India Inc Expects 35-50 bps RBI Rate Hike, After US Fed

The global economy has been rattled by scorching inflation and geo-political tensions, forcing more central banks to join the US Federal Reserve in raising interest rates. The Fed set the pace with a 0.75% rate hike to a range of 3% to 3.25%. That is the fifth rate hike this year and up from zero at the start of the year. According to market experts, India could see an aggressive rate hike by the Reserve Bank of India (RBI) in coming week. The RBI’s policy decision is due on 30 September, with most market participants expecting it to hike rates by 35-50 basis points.

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What The Economists Said:

Analysts at ICICI Securities believe the RBI may raise its policy rate by another 50 bps at its policy meeting at the end of this month, and a further 25 bps in December meeting to 6.15%. The domestic brokerage firm also added that the cumulative impact of this year’s monetary tightening is likely to help bring headline CPI inflation back below 6% YoY in Nov’22 and beyond.

The narrative of terminal repo rate in India has suddenly shifted to 6.50% from 6.00% in a matter of a few days, which is leading to excessive selling pressure as bond yields get adjusted,” said Nandan Pradhan, deputy general manager, treasury, at Cosmos Bank.

“We expect a 35-50 basis point hike from the MPC given that the inflation is still a concern due to supply-side issues and evolving geopolitical scenarios around the Russian-Ukranian conflict and the Sino-American tussle,” Vivek Iyer, partner and leader (financial services risk) at Grant Thornton Bharat, stated.

How Investment Will Be Affected:

Market analysts say the continued hike in US interest rate may be risky for the Indian stock market, but it also provides an opportunity for foreign investors to diversify globally. “While rising in Interest rates represent a headwind for Indian equities, our buoyant domestic demand scenario presents a sliver of hope for global investors looking to diversify globally. We remain constructive on Indian equities over the medium-term and continue to orient our portfolios around domestic cyclical which continue to look attractive to us from a medium-term perspective,” said Trideep Bhattacharya, CIO Equities, Edelweiss MF.

Inflation Path:

On India’s CPI inflation rate, Deutsche Bank said the country’s headline retail inflation will likely rise to a five-month high of 7.4% in September, with the risk of going higher if the momentum of food and vegetable prices picks up further in the rest of the month. “Our nowcasting exercise reveals that CPI inflation is tracking around 7.4% yoy in September vs. 7.0% yoy in August,” chief India economist Kaushik Das said in a note dated 20 September.

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