The Reserve Bank of India (RBI) is all set to continue the trend of increasing on 30 September 2022 when it is expected to go for a 50 bps hike which would shoot the current repo rate of 5.4% to 5.9%. The RBI has already increased 140 bps this year and the next hike would probably not be less than 50 bps as it has many challenges to face. Also, the RBI in its previous MPC stated that a ‘50 bps hike is the new normal’.
The US Fed seems to be going all guns blazing when it comes to increasing . Despite a 75 bps hike in the third straight meeting, Jerome Powell signaled that it might continue to tighten its monetary policy throughout the year which torpedoed the currencies of both developing markets and emerging markets to multi-year lows.
The rupee was also one of the currencies to face the rout. The record plunge of the rupee is already putting a strain on the forex reserves of the country which are already down to US$545.6 billion, from US$642.02 billion in November 2021. The RBI can’t continue to use reserves perpetually and needs to minimize the interest rate differential between the US and India to stop fund outflow.
Inflation is also one factor that needs to be taken care of. The August data came in at 7%, which was a noticeable uptick from 6.71% in July 2022. Inflation is expected to moderate below the RBI’s tolerance range of 6% on the upside, by Q4 FY23 but it might remain elevated over the next immediate months, all thanks to the lagging effect of rate hikes. Although, it seems like the worst is over, especially looking at the prices comfortably sustaining around US$90 per barrel, the way the rupee had been torpedoed in the last couple of weeks, the imported inflation is likely to sustain at higher levels.
Now, the rate hike is imminent, the only question is by how much. If the RBI goes for a 50 bps hike, the could mark a temporary bottom here as it is also hovering at very strong support of 16,800. Also, the relentless fall in the last few session has probably already discounted it. However, a lower than 50 bps hike might trigger another wave of sell-off in the currency market which would not be a good sign. Anything above 50 bps would skew RBI’s stance to a more hawkish one which again could be troublesome for the markets. In my opinion, a 50 bps hike could be a sweet spot for the markets to take support.
