RBI may hike repo rate by 25-50 basis points at monetary policy meeting next week

The Reserve Bank of India's (RBI) rate-setting committee is likely to hike 25-50 basis points in repo rate in the monetary policy meeting to be held between August 3-5, according to the estimates of various fund managers and economists.

Economist and fund managers are of mixed view on the policy stance. Few are expecting stance will be changed to 'Neutral', while some say 'Withdraw of accommodative stance could persist'.

"We expect 40-50 bps hike in repo rate in August policy review. Withdraw of accommodative stance could persist," said Vivek Kumar, Economist, QuantEco Research.

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In last two policies, the central bank has hiked the rate by a cumulative of 90 basis points in May and June, due to high inflation, which was breaching RBI's upper tolerance band for the consecutive months.

"25-35 bps of repo rate hike. Stance may switch to neutral. Guidance may be somewhat more comforting than previous policy given some correction in commodity prices and range bound crude oil prices," said Mahendra Jajoo, CIO, Fixed Income at Mirae Asset Investment Managers.

On the inflation front, Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, said risks to domestic inflation remain on the upside in case of continued pass-through of high input prices, pass-through of higher crude prices to domestic pump prices, and higher food prices due to weak monsoon or lower acreage.

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She also added that geopolitical tensions and implications for energy prices will remain a risk of inflation. Along with inflation, the RBI will be mindful of the external sector imbalances too. Trade deficit can remain wide in case of a sharper fall in exports due to global demand slowdown while imports remain sticky.

While, Pankaj Pathak, Fund Manager at Quantum Mutual Fund expects the RBI's commentary to soften a bit with an acknowledgement that inflation risks are receding.

Growth forecast is likely to remain unchanged due to fall in growth globally. "There should not be much change in the outlook for either growth or inflation. Growth can be expected to come down along with global growth and inflation is anybody's guess," said Sandeep Bagla, CEO Trust Mutual Fund.

Participants are expecting after the rate hike by the central bank, the yield on the government bonds to rise further by 15-20 basis points from the current level. But, the levels on the bonds will also follow the movement in prices of crude oil and US Treasury yields.

The long end of the curve is pricing in rate pause or rate reversal whereas shorter end of the curve is pricing aggressive rate hikes leading to curve flattening. In such a scenario markets are likely to be volatile reacting to every development.

"However, bond markets have largely priced in rate hike therefore, they are expected to be range bound in the upcoming policy unless there is a surprise element in the policy announcement," Jajoo added.

Meanwhile, on the rupee front, experts believe that RBI will intervene in the market to avoid undue volatility, but not target any particular level.