RBI PMC meeting: Key interest rates set to return to pre-Covid levels

India’s central bank is expected to raise its key interest rate by half a point on Friday to signal that it is not relaxing its fight against inflation while fending off further attacks on the rupee.

Thirteen of 27 economists polled by Bloomberg on Wednesday see the Reserve Bank of India’s six-member monetary policy committee raise the repurchase rate by 50 basis points to 5.40%, a level last seen in August 2019 One predicts a 40 basis point move, nine expect 35 basis points and the others expect a quarter point rise, which is enough to bring borrowing costs down to US levels. before the pandemic of early 2020.

As Federal Reserve officials signal a pause is out of the question until they see evidence of slowing inflation, RBI watchers will be watching Governor Shaktikanta Das’ remarks closely. for any indication of the pace and duration of the monetary tightening cycle as it seeks to ensure a ‘soft landing’ for the economy. The central bank has raised the policy rate by 90 basis points since May, including a up half a point in June.

Here’s what to watch for in his remarks from 10:00 a.m. in Mumbai:

Inflation forecast

While inflation has remained above the RBI’s 6% target ceiling since the start of the year, falling commodity prices could give the central bank room to suggest pressures are easing .

“We expect the RBI’s comment to tone down a bit in acknowledgment that inflation risks are receding,” said Pankaj Pathak, fixed income fund manager at Quantum Asset Management Co.

Inflation may have peaked in India, said Radhika Rao, senior economist at DBS Bank Ltd.

Still, Rao expects RBI’s inflation and growth projections to remain unchanged at 6.7% and 7.2% respectively for the current fiscal year. Lack of rainfall in parts of India’s rice-growing regions could reduce grain production and complicate the RBI’s fight against inflation.

hiking trail

Even if the central bank slows rate hikes, economists believe that the maximum policy rate, or what is generally called the terminal rate, will be reached earlier than expected in the cycle.

“The RBI should continue to ‘pre-load’ its rate hikes on upcoming policy,” said economist Abheek Barua of HDFC Bank Ltd.

Barclays Plc now sees the key rate rise to 5.50% by September from an earlier forecast of mid-2023. This will signal that rates have reached neutral territory, said its India-based economist Rahul Bajoria, referring to a level where rates can help control inflation without stifling economic growth. It maintained its terminal rate projection at 5.75%.

“From a bond markets perspective, a lot of this is already priced in,” Quantum Asset’s Pathak said. Benchmark 10-year bonds capped their first monthly gain this year in July and extend the rally ahead of the policy review. 40 basis points from a three-year high of 7.6% seen in June.

Rupee, Liquidity

As the rupee hit a series of lows in recent months, falling from $80 to $1 in July, it retreated amid signs of a return in foreign fund inflows. Dovish signals from the monetary authority may not suit forex traders.

“RBI should keep an eye on interest rate differentials with the US to curb any buildup of speculative pressures on the INR, triggered by low implied yields that reduce the cost of shorting the rupee” , said Prasanna Ananthasubramanian, chief economist of ICICI Securities Primary Dealership Ltd. wrote in a note. “If RBI and MPC take a dovish stance, the risk of deeper declines in the rupiah becomes greater.”

Markets will also seek assurances from the RBI that there is sufficient liquidity and that the central bank is ready to implement measures to address any strains.

This story was published from a news feed with no text edits. Only the title has been changed.

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