Street bets on rate hikes as MPC meet gets underway

The monetary policy committee (MPC) meet will commence on 06th June and culminate on 08th June with the announcement of the monetary policy statement.

The unscheduled May policy meet had set the tone for future policies and had signalled the shift from a neutral policy to a more hawkish policy. That was apparent in the May special MPC meet, which hiked repo rates by 40 bps and CRR by 50 bps.
 

Here is what the street expects on June 08th

1) It is anticipated that the RBI would hike repo rates by 40 basis points for the second time in five weeks. This is based on a survey of economists. However, the range of rate hikes range from 35 bps on the lower side to 50 bps on the higher side. 

2) This is largely corroborated by the last available inflation data. The CPI inflation for April 2022 had come in at 7.79% while the wholesale WPI inflation for April 2022 had come in at 15.08%. RBI continues to stick to its long term median repo rate target of 4%.

3) One more reason for the aggressive rate stance could be the US Fed action. In the last 2 meetings, the US Fed has hiked rates by 75 bps and it has guided for another 200 bps rate hike by December 2022. The RBI cannot afford to have too much of divergence in rates with the US as it would negatively impact capital flows into India.
 

4) One of the first targets of the RBI is to revert the repo rates to the pre-COVID levels of 5.15%. Even if the rates are hiked by another 50 bps in the June 08th policy, the Indian repo rates would still be short of the pre-COVID levels by 25 bps.

5) While the street is unanimous on the repo rate hike, the feedback on the CRR hike is more ambiguous. While there is a case for a 25-50 bps CRR hike, some sections also feel it could be put off since substantial liquidity absorption has already happened with the VRRRs and the previous CRR hike absorbing Rs87,000 crore.

6) An important shift in the monetary policy of June would be an increase in the inflation estimate for 6.5%. In the last policy in April, the MPC had increased the inflation estimate for FY23 by 120 bps from 4.5% to 5.7%. In the June policy, it is expected that the inflation outlook could be enhanced by another 80 bps to 6.50%.

7) With the RBI governor underlining that the primary goal of the RBI now would be to contain inflation, there is no ambiguity about the rate hikes. While a rate hike of 40 bps to 50 bps is almost certain, the CRR could still be a debatable issue. 

8) However Bank of America has expressed the view that the RBI may sustain its aggression and amplify its rate hike effort with another 50 bps hike in CRR. This would absorb an additional Rs87,000 crore of liquidity from the market and apply the brakes on too much of asset price inflation in India.

9) One factor the RBI would be looking at is the bond yields. On 06th June, the bond yields touched a 3-year high of 7.5%, indicating that there was still scope for tightening liquidity in the system. 

Apart from all these factors, the current monetary policy could also contain some guidance on the government borrowing program. With the government hinting at borrowing another Rs1 trillion to cover the inflation battle costs and with fiscal deficit likely to shoot up from 6.4% to 6.9%, it is the borrowing program of the government in H1 and H2, that will be of a lot of interest to the markets.