RBI likely to go for another rate hike in near future

RBI continued with hawkish policy as repo rate was hiked (3rd time in a row) by 50 bps and is back to the pre-pandemic level. One shouldn't wonder if the apex bank goes for yet another round of rate hike, that too in the same quantum or by 50 bps in near future.

Of course, RBI's act may dampen sectors like affordable housing due to sharp increase in EMI still it should be seen as an astute step by the apex bank, whose worries are manifold.

Elevated inflation and resilience in domestic market prompted MPC to hike rates. It also took the view that further calibrated monetary action is needed. GDP and CPI forecast for FY23 has been retained at 7.2 per cent and 6.7 per cent respectively. Inflationary pressures are broad based and remain uncomfortably high and above RBI's upper tolerance level. BoB expects another 50 bps rate hike in the current cycle.

In June policy statement, RBI Governor mentioned that inflation projection of 6.7 per cent for FY23 doesn't take into account the impact of monetary policy actions taken today (i.e. 50 bps hike on last Friday). Even though the RBI may have frontloaded the rate hikes, it remains to be seen how it influences the trajectory of rupee over the medium term. While the rupee did witness a smart recovery after the policy announcement, it was unable to hold onto the gains. SBI research suggests that countries with low prior forex reserves are more likely to choose an interest rate defence than countries with high reserves. This is probability not the case for India (forex reserves: $572 billion). Further, defending the currency through interest rates could also indicate the market participants getting into a self-fulfilling prophecy of expecting more rate hikes to automatically protect the domestic currency whenever it is under pressure. However, in a situation when current account deficit is likely to cross 3.5 per cent, raising the rates might be the best carry trade bet to finance the large current account deficit (CAD).

RBI retained real GDP growth projection for FY23 at 7.2 per cent. However, 39.2 per cent of the loans are benchmarked to external benchmarks (EBR), so the increase in repo rate of 140 bps will eventually increase interest cost on consumers Rs 42,500 crore on Retail & MSME. This may have an impact on growth. Rural demand has also been impacted going by the results of FMCG companies.

The RBI has reiterated its commitment to bring inflation down hinting at future rate hikes without giving the exact amount of rate hikes. However, the word count analysis of Governor's Statement indicates how rupee is getting featured more often along with inflation and growth. RBI's measures on bringing CICs under the ambit of Ombudsman scheme and Standalone Primary Dealers/BBPS should enhance the latitude as well as longitude of relevant segments. RBI would strive to keep yield threshold at 7.5 per cent.