Eye on return to pre-Covid rates: Markets brace for ‘no-brainer’ hike

After the 40-bp hike in repo rate to 4.40 per cent last month, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is set to go for another rate hike to tackle the elevated inflation level at its upcoming meeting on Wednesday.

The bond and stock markets are already positioned for a front-loaded hike in repo rate — the main policy rate at which RBI lends funds to banks.

The broader market expectation is that the central bank will hike repo rate by around 40-50 basis points (bps) in the June meeting. Any smaller rate hike will be a positive surprise and short-term bond yields may soften marginally.

RBI Governor Shaktikanta Das has already indicated about the rate hike. “Expectation of a rate hike is a no-brainer. There will be some increase in the repo rate. By how much, I will not be able to tell now but to say that (it will be hiked) to 5.15 per cent now will not be accurate,” he had said on May 24.

“With inflation persisting beyond 6 per cent (the upper limit of the tolerance band) and growth chugging along, we expect the RBI MPC to hike policy repo rate by 40 bps in June and 35 bps in August. We must highlight that for the sake of standardized steps, the chances of delivering a 50+25 bps hike combination is quite high too,” said a report from Bank of America Securities.

The key thing is that the RBI MPC is likely to exit ultra-accommodation by August and take policy repo rate to the pre-pandemic level of 5.15 per cent.

“Accordingly, until then, the RBI MPC is likely to retain the stance as accommodative while focusing on withdrawal of accommodation. Thereafter, as inflation continues to stay high, we see the RBI MPC take policy repo rate to 5.65 per cent by March 2023,” it added.

On May 4, bringing an end to the low interest rate regime, the RBI jacked up the repo rate by 40 bps to 4.40 per cent and the cash reserve ratio (CRR) by 50 bps to 4.50 per cent to bring down the elevated inflation and tackle the impact of geopolitical tensions.

However, the central bank retained the accommodative monetary policy in an unscheduled meeting of the MPC.