RBI expected to hike its repo rate by 35bp to 5.25% – TDS

Analysts at TD Securities (TDS) offered a brief preview of the Reserve Bank of Indian (RBI) monetary policy decision, scheduled to be announced on Friday. The central bank is widely expected to announce the third consecutive increase in interest rate, through markets seem divided over the size of the hike.

Key Quotes:

“We look for the RBI to hike its repo rate by 35bp to 5.25% (cons. 5.40%), shifting to a more measured pace of hikes at its August 5 meeting after hiking by a total of 90bp in May and June and introducing a standing deposit facility to withdraw surplus liquidity in April. Risks are skewed towards a bigger move, but we think the RBI will want to moderate the pace of tightening going forward as inflation has likely peaked.”

“CPI inflation has fallen from its April high of 7.8% but remains well above the RBI's 2-6% target range. Food and energy have been prime drivers of CPI as in most countries but there was a little softening in those components last month and we expect this to continue in the months ahead.“

“The RBI highlighted in its July 2022 Bulletin that the drop in inflation is happening more quickly than anticipated while trying to ensure a soft landing for the economy, suggesting less urgency for aggressive hikes. We anticipate further hikes, with a terminal rate of 6.0% expected in Q1 2023.”