The Reserve Bank of India (RBI) may increase repo rate by anywhere between 35 and 50 basis points at the upcoming Monetary Policy Committee (MPC) meeting scheduled for August 5, say economists.

While it should not be seen as any synchronised action, the RBI’s rate hike will follow the US Federal Reserve’s decision on Wednesday to raise its benchmark interest rate by a sizable three quarters of a point ( 75 basis point) for the second straight time in its push to tame the worst inflation outbreak in the US in four decades, they said.

Fed Chair Jerome Powell on Wednesday asserted that the US was not in recession while pointing to a robust labour market. He highlighted that there have been several instances in the past when GDP growth was in the negative territory but it was seen as a transitory thing and the directional strength of economy as measured by the labour market was strong.

However, the official US GDP data released on Thursday showed that the US economy indeed shrank in April -June 2022 for a second straight quarter, contracting at 0.9 per cent and raising fears that the nation may be approaching a recession.

What RBI may do next week 

Saugata Bhattacharya, EVP—Business and Economic Research & Chief Economist, Axis Bank, said he expects the RBI to go in for anywhere between 35 and 50 basis points rate hike. “It ( what is the likely rate hike) is a million dollar question. Actual rate that the RBI will go in will depend on internal RBI surveys, consumer confidence, capacity utilisation household inflation expectations etc. Our sense is they will try to go past the earlier rate of 5.1 per cent.”, Bhattacharya said.

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, said, “The RBI will remain focused on clamping down domestic inflation in the August policy. With no surprises from the Fed, we expect the RBI to remain on track to hike repo rate by 35 bps while maintaining a hawkish stance. 

Stock market cheers

The Indian benchmark stock indices staged a spectacular rebound on Thursday echoing global stock markets optimism post Fed’s comment on reaching near “neutral rate”.

Ritika Chhabra, Economist and Quant Analyst at Prabhudas Lilladher, said the US Fed’s decision is the first back to back 75 bps rate hike in the US since 1980s. “However, what cheered the markets were Jerome Powell’s comments. Investors were hoping for some dovish comments from the Fed chief after aggressive back to back rate hikes and they sure got what they hoped for. Powell mentioned that with the current rate hike, much of the front loading of the hiking cycle is achieved and the current interest rate levels are in line with ‘neutral’ interest rate.  The ‘neutral’ rate means a rate which is neither too accommodative, nor too restrictive for the economy, thus implying that the Fed thinks it is no longer behind the curve,” she added.

Shrikant Chouhan, Head of Equity Research (Retail), Kotak Securities Ltd, said that Indian benchmark indices outperformed their Asian peers on the last day (Thursday) of the current month expiry, as there was no surprise in the rate hike decision by the US Federal Reserve which came on expected lines, fuelling a rally in the US markets. 

The upbeat mood also had a rub off effect on the domestic market, leading to buying in banking, IT, metals and realty stocks.