RBI likely to hike repo rate by 30-50 basis points

New Delhi: The meeting of the Monetary Policy Committee of the Reserve Bank of India (RBI) to set the short term inter-bank policy rates is expected to hike the repo rate by another 30-50 basis points to tame the persistently high retail inflation which touched 7.79% in April, an 8-year high. The three-day Monetary Policy Committee meeting that began in Mumbai on Monday is expected to conclude on Wednesday. However, this time the outcome is to be on expected lines that the Reserve Bank has finally reversed the low rate cycle of two COVID years as excess money supply in the market and supply side disruptions pushed the retail and wholesale inflations beyond the comfort zone of policymakers.

While India’s wholesale inflation (WPI) has been in double digit for more than a year, the retail inflation measured as the Consumer Price Index (CPI) in April was two percent above the upper ceiling set by the Union government for the Reserve Bank under the law. It had prompted the RBI to convene an unscheduled meeting last month and announce a 40 basis points hike in the reverse repo rate to take it to 4.4%. Though the economists and industry was surprised by the RBI’s sudden move as it may affect credit growth to shore up the sagging economy, many believed that it was the right thing to do as a runaway inflation has the potential to derail the fragile economic recovery.

Economists also argued that there was a scope for another 50 basis points hike in the repo rate that will take it to near 5%. Three weeks after the 40 basis point hike in the repo rate, RBI governor Shaktikanta Das also clarified on May 23 that further rate hikes were in the offing in June meeting. "Expectation of rate hike, it is a no-brainer. There will be some hike but how much I will not be able to tell now," Das had said in an interview.

High energy and commodity prices triggered by the Russia-Ukraine war that have led to record inflation in most of the advanced and emerging economies will weigh heavy on the members of the committee. While the inflation is at a 40-year high in the USA, in several European and Mediterranean countries such as Turkey, it is at an even higher level. The crude oil prices are expected to be in the range of $120 per barrel at least for the next two months and India being a net energy importer which imports 85% of its crude from abroad is under extreme pressure.

Secondly, supply side disruptions caused by the Omicron variant still persists as trajectory of pandemic is still uncertain. This fact, coupled with the outbreak of Monkeypox cases would weigh heavily on the minds of the monetary policy committee members. Further, the US Dollar-Indian Rupee exchange rate is expected to be in the range of Rs 76-78 per US Dollar for the next three quarters which is putting pressure on the country’s balance of payment situation. Economists believe that in the ongoing monetary policy committee meeting, the Reserve Bank may further hike the repo rate by another 30-50 basis points but the real curiosity is whether the Reserve Bank would maintain accommodative stance or not.