RBI likely to raise repo rate 50 basis points to 5.9% in Sep policy: Morgan Stanley


Mumbai, Sept 16 (IANS) The Monetary Policy Committee is likely to raise the repo rate by 50 basis points to 5.90 percent in its September credit policy and will keep its stance unchanged, according to a report by Morgan Stanley (NYSE:).

“We previously expected a 35 basis point increase, but sticky inflation and the continued aggressive stance of DM central banks justified an ongoing frontload of rate hikes in our view,” the report said.

Inflation that is above the upper tolerance band of the Reserve Bank of India (RBI) for the eighth consecutive time and therefore Morgan Stanley also expects inflation to remain stable in September at around 7.1-7.4 percent, driven by increases in food prices following the high-frequency food price trend.

After that, we expect the trend to moderate, but remain above 6 percent until January/February 2023. global commodity prices and the possibility of imported inflation if the exchange rate weakens amid the dollar’s strength, the report added.

Going forward, the following keys will be followed in the policy: (a) changes in the growth or inflation forecast. While incoming inflation data is in line with expected ones, growth for QE Jun was slightly below our expectations (even RBI forecasts), (b) comments on comfort on the external balance sheet in the context of external risks and (c ) general tone of the policy statement and path on normalization of real interest rates.

The RBI has increased the repo rate by 140 basis points and excess liquidity has fallen significantly (now $19.1 billion, from $89 billion in January 2022), pushing the weighted average call rate from 3.5 percent in April to 5 percent. increased.

However, the normalization of real interest rates has been less strong, with a real policy rate of -1.6 percent currently compared to -3.8 percent in April. The external environment remains challenging, with generally higher commodity prices versus pre-pandemic, a stronger dollar and continued aggressive response from DM central banks. While domestic macro fundamentals are strong, risks from continued high commodity prices should be monitored.

Against this background, we expect monetary policy normalization to continue, with the terminal repo rate being locked at 6.5 percent in February 2023. Risks to the terminal repo rate appear to be on the upside, driven by external factors, which could potentially keep inflation higher for longer.



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