Monetary Policy Preview: Abheek Barua, Chief Economist at HDFC Bank

7 Jun 2022 , 04:23 PM

At the upcoming policy meeting, the RBI is expected to raise the policy rate by 25 bps while continuing to keep its stance and the CRR rate unchanged. We tilt on the side of a 25 bps rate hike instead of 50 bps as we do not see a compelling case for a larger rate hike at this stage. For one, the central bank could take comfort from the recent measures announced by the government to combat inflation. Moreover, the expectation of a normal monsoon and some recent moderation in global food prices also provide some comfort for the food inflation outlook. Finally, after delivering a 40 bps rate hike in May, the central bank could err on the side of caution and avoid any major disruptions in the financial market (especially in regards to the bond market where keeping borrowing costs at bay remains a key objective) and to growth, which remains uneven and has shown signs of a fragile recovery at best.

Policy Stance: We do not expect any change in the current monetary policy stance despite the increase in rates. From what we understand, the “accommodative while focusing on withdrawal of accommodation” stance is perhaps in line with the central bank’s move towards pre-pandemic levels of interest rates (repo rate at 5.15%) — so a reset in rates instead of a sharper tightening.  If our reading is correct, the stance could remain unchanged until the pre-pandemic level of interest rate (or thereabouts) is achieved.

Change in forecasts: We do expect the RBI to change its inflation forecast by 70-80bps from 5.7% earlier citing the change in global and domestic price pressures. Although the growth forecast is expected to be kept unchanged at 7.2% for FY23.