Monetary policy: RBI expected to bring interest rates back to pre-pandemic levels

Indian central bank watchers agree that interest rates will be raised to pre-pandemic levels on Friday, but are divided on the size of the increase aimed at tackling inflation and supporting a weak currency.

Sixteen of 36 economists polled by Bloomberg see the Reserve Bank of India’s six-member monetary policy committee raise the repurchase rate by half a point to 5.40%, a level last seen in August 2019 Fourteen of them are calling for a 35 basis point hike, five for a quarter point stock and one for a 40 basis point increase – each of these moves being enough to bring the cost of borrowing back to lows. end of 2019 levels.

As Federal Reserve officials signal a pause is out of the question until they see evidence of slowing inflation, RBI watchers will be watching Governor Shaktikanta Das’ remarks closely. for any indication of the pace and duration of the monetary tightening cycle as it seeks to ensure a ‘soft landing’ for the economy. The central bank has raised the policy rate by 90 basis points since May, including a up half a point in June.

Here’s what to watch for in his remarks from 10 a.m. Mumbai:

Inflation forecast
While inflation has remained above the RBI’s 6% target ceiling since the start of the year, the fall in commodity prices could allow the central bank to suggest that pressures are easing.

“We expect the RBI’s comment to tone down a bit in acknowledgment that inflation risks are receding,” said Pankaj Pathak, fixed income fund manager at Quantum Asset Management Co.

Inflation may have peaked in India, said Radhika Rao, senior economist at DBS Bank Ltd.

Still, Rao expects RBI’s inflation and growth projections to remain unchanged at 6.7% and 7.2% respectively for the current fiscal year. Lack of rainfall in parts of India’s rice-growing regions could reduce grain production and complicate the RBI’s fight against inflation.

hiking trail

Even if the central bank slows rate hikes, economists believe that the maximum policy rate, or what is generally called the terminal rate, will be reached earlier than expected in the cycle.

“The RBI is likely to continue with the ‘frontloading’ of its rate hikes in the coming policy,” said economist Abheek Barua of HDFC Bank Ltd.

Barclays Plc now sees the key rate rise to 5.50% by September from an earlier forecast of mid-2023. This will signal that rates have reached neutral territory, said its India-based economist Rahul Bajoria, referring to a level where rates can help control inflation without stifling economic growth. It maintained its projection for the terminal rate at 5.75%.

“From a bond markets perspective, a lot of this is already priced in,” Quantum Asset’s Pathak said. Benchmark 10-year bonds capped their first monthly gain this year in July and extend the rally ahead of the policy review. Yields are down nearly 40 basis points from the three-year high of 7.6% seen in June.

Rupee, Liquidity

As the rupee hit a series of lows in recent months, falling from $80 to $1 in July, it retreated amid signs of a return in foreign fund inflows. Dovish signals from the monetary authority may not suit forex traders.

“RBI should keep an eye on interest rate differentials with the US to curb any buildup of speculative pressures on the INR, triggered by low implied yields that reduce the cost of shorting the rupee” , said Prasanna Ananthasubramanian, chief economist of ICICI Securities Primary Dealership Ltd. written in a note. “If RBI and MPC take a dovish stance, the risk of deeper declines in the rupiah becomes greater.”

Markets will also seek assurances from the RBI that there is sufficient liquidity and that the central bank is ready to implement measures to address any strains.

The central bank should continue to focus on prices and not worry about the weakness of the rupee which is at a “pretty good level”, ex-RBI governor Raghuram Rajan said in an interview on Bloomberg Television’s Balance of Power With David Westin on Wednesday. “If you focus on controlling inflation, the exchange rate finds the appropriate level.”

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