RBI may raise key rate by 35-50bps

Chennai: The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) is expected to raise the policy rate ranging between 35 to 50 basis points (bps) on Friday, experts believe.The experts also point out that the rate revision by the US Federal Reserve and the central banks of many other countries have taken an aggressive stance on the rate revision.

In a report Emkay Global Financial Services said: "Clearly, central bankers globally are confronting the classic 'trilemma' of international finance: one cannot have a stable currency, unfettered capital flows, and independent monetary policy all at the same time."

"In the upcoming credit policy of RBI which is scheduled on Sep 30, 2022, we expect MPC to raise repo rate by another 50bps. We expect rates to increase up till 6-6.25 per cent," said SonalBandan, economist with Bank of Baroda.

In its recent report, Bank of Baroda said significant risks have emerged for growth and inflation forecasts.

"While risks to growth are driven by slowdown in global growth, risks to inflation are more domestic in nature. Deficient/untimely rain is estimated to have impacted output of rice and pulses," Bandan said.

The other developments that RBI would consider are volatility in the currency and bonds market, Bandan said. Since the last policy, RBI will be evaluating changes in oil prices, trends in inflation, monsoon and sowing, movement of high frequency indicators and global developments.

In a report, Morgan Stanley has also said the MPC is likely to increase the repo rate by 50bps, to 5.9 per cent, with an unchanged stance.

On inflation, Morgan Stanley said it has been range-bound around the 6-7 per cent mark since January 2022 (barring April 2022).

"We expect inflation to remain sticky around 7.1-7.4 per cent in September as well, driven by increases in food prices as per high frequency food price trend. Thereafter, we expect the trend to moderate but remain above 6 per cent until Jan/Feb-23," Morgan Stanley's report noted.

According to the report, the inflation outlook is towards on the upside due to uncertainty around food inflation trajectory (sowing for rice, pulses is lower YoY), changes in global commodity prices and possibility of imported inflation if exchange rate weakens amid dollar strength.