RBI is likely to increase the repo rate by 50 basis points to 5.9% in the September policy

RBI is likely to increase the repo rate by 50 basis points to 5.9% in the September policy

Hyderabad: The Monetary Policy Committee, the credit policy is likely to increase its repo rate by 5.90% and will not change its viewpoint. The reports said they were earlier expecting a 35bp increase but the sticky inflation and continued hawkish stance of DM central banks, and warrants are continuing front loading of rate hikes.

RBI is likely to increase the repo rate by 50 basis points to 5.9% in the September policy
RBI is likely to increase the repo rate by 50 basis points to 5.9% in the September policy

The inflation is ranging above the upper tolerance band of RBI for the 8th straight and Morgan Stanley to expects inflation to remain at 7.1-7.4 % in September as well, driven by increases in food prices as per the high-frequency food price trend.

Moreover, the reports said, they expect the trend to moderate but it remains above 6% until Jan-Feb 2023. The risks to the inflation outlook are going upside due to the uncertainty of the food inflation trajectory.

To track the policy,

  1. Changes to growth or inflation forecast
  2. Comments on the external balance sheet in the context of external risks.
  3. Overall tone of the policy statement and path on real rate normalization

The RBI has already reduced the repo rate by 140 basis points and surplus liquidity has fallen, now to $19.1 billion from $89 billion in Jan 2022. The normalization rates have been less stark with the real policy rates at -1.6% currently and -3.8% previously in April 2022. However, the external environment is still challenging with generally higher commodity prices compared to the pre-pandemic era. While domestic macro fundamentals are still strong, risks from continued elevated commodity prices need to be tracked.

Against this backdrop, they expect monetary policy normalization to continue pegging the terminal repo rate at 6.5% by Feb 2023.

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