Economists expect RBI delivering another 50 bps hike next week: Monetary Policy Committee meeting

According to all economists, the central bank would have to raise interest rates by 50 basis points next week to reach the terminal rate of 6.25 per cent by the end of the year.

In a rare instance of agreement, economists from SBI, UBS, Goldman Sachs, Barclays, and Bank of Baroda predict that the RBI-led Monetary Policy Committee will increase the repo rate by 50 basis points on September 30. This will bring the total increase in repo rates to 5.90 percentage points since May of this year.

In a thorough note published on Monday, Soumya Kanti Ghosh, the group chief economist of the largest lender in the country, SBI, stated that a half-percentage-point increase in the repo rate is imminent as a swift reaction to external shocks.

"We expect the peak repo rate in the cycle at 6.25 per cent. A final rate hike of 35 bps is expected in December policy," he stated.

After 40 months, liquidity has turned into a deficit, which appears to be another challenge for the central bank, he said, adding that this may push the RBI to support the market by altering the CRR and OMOs.

Tanvee Gupta-Jain of UBS Securities India, who shared the same opinions, stated that she anticipates the MPC-RBI to front-load the rate hike cycle and raise the repo rate by an additional 50 basis points (versus 35 previously) the following week, bringing the terminal repo rate to 6.25 per cent (previously 6 per cent) by December.

On the bright side, she claimed that supply-side factors rather than easy credit conditions driving domestic demand are primarily responsible for the significant current account deficit, elevated CPI inflation, and stretched fiscal position.

Rahul Bajoria, the chief economist at Barclays India, also increased the forecast for the repo rate to a 50 basis point increase next week (up from 35 basis points) and a 35 basis point increase in the December meeting (up from 25 basis points), with the forecast being more likely to be exceeded if commodity prices rise in Q4.

"We now expect 50 bps of further rate hikes in 2023 (75 bps previously) which would take the repo rate to 6.75 per cent by April 2023."

The British lender believes that inflation has peaked and anticipates that the MPC-RBI will shift to a neutral position on declining commodity prices. However, it is believed that the MPC will continue with its front-loaded tightening cycle as a result of tighter global financial conditions and high inflation.

A hike of 25 to 35 bps would have indicated that the RBI is confident the worst of the inflation is over, but Madan Sabnavis, the chief economist at Bank of Baroda, said that recent developments in the forex market may prompt a higher quantum of 50 bps to stay on track with other markets and maintain investor interest.

Santanu Sengupta of Goldman Sachs stated that he had also budgeted for a 50 bps increase (up from 35 bps) and a 35 bps increase in December (up from 25 bps), with the forecast being at risk of exceeding expectations if commodities prices rise in Q4.

We now anticipate 50 basis points (bps) more rate increases in 2023 (compared to 75 bps earlier), bringing the repo rate to 6.75 per cent by April 2023.

(With inputs from PTI)