The Reserve Bank’s rate-setting committee will raise the benchmark rate by 0.35 to 0.50 percent at next week’s review meeting, Axis Bank chief economist Saugata said Thursday. Bhattacharya.
A hike of such amount will lift the repo rate beyond the 5.15% level, at which the RBI had started the ultra-accommodative measures in the face of the COVID-19 pandemic, he told reporters. .
It may be noted that the Monetary Policy Committee (MPC) raised rates in two consecutive movements in May and June by a cumulative 0.90%, bringing the repo rate at which it lends to the system to 4.90%, in the purpose of containing inflation.
Bhattacharya said the MPC will enter internal surveys such as household inflation expectations and consumer confidence while deciding the quantum of the rate hike.
He said the rate hike would be both an attempt to stem inflation expectations and part of it would be a frontloading of equities.
A majority of central banks in the developed world like the US Fed, which raised rates by 0.75% and the European Central Bank have also adopted a frontloading strategy as it increases the chances of a soft landing for the economy. , did he declare.
Bhattacharya said the RBI is also likely to continue tightening after next week’s hike and expects the repo rate to be at 5.75% by the end of this fiscal year.
He said headline inflation will continue to cross the 6% threshold for many months and is expected to calm down after peaking in September on a low base.
The average CPI for FY23 will be 6.7%, the chief economist said, adding that it will not drop below 6% until March.
He said the ongoing depreciation of the currency had an impact on inflation given import dependence, and also added that lately there had been some easing in commodity prices.
Bhattacharya also appreciated the RBI’s handling of pressures on the currency by intervening in various ways to ensure smooth movement of the currency.
The government has been constrained in spending lately, Bhattacharya said, calling it a “puzzling” aspect that needs to be watched given the growth needs of the economy.
There will likely be significant fiscal slippage and the budget deficit will reach over 9.7% for FY23, he said, adding that 5G auction revenue will not help matters as the actual payments are spread over several years.
On the cash front, he said the surplus would drop to a manageable Rs 2-2.5 lakh crore by September if government spending increased, and could reach neutral by December, a- he declared.
The bank expects GDP growth to reach 7.1% for FY23, he said. Rising wages in the IT industry could impact growth as the profitability of IT companies declines, he warned.
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