Which way will the RBI lean after Fed’s latest 75 bps interest rate hike? The pundits reckon the Indian monetary policy makers will stick to their cautious and conservative stand: raise only to tame inflation and make sure that aggressive hikes don’t scupper growth. The stand will be clearly spelt out on Friday with many expecting only a modest rate hike of 25 bps -- at the very best – amid talk that inflation will start to cool.

The RBI has tailed the advanced economy central banks while raising rates two years since Covid-19 first broke. The Fed has raised the policy rate by 300 basis bps in calendar year 2022; the RBI on the other hand has raised by 90 basis points. There is no sign that the RBI even wants to play catch up with the Fed.

With a hike in its policy repo rate on the cards, Reserve Bank of India’s stand on inflation amid softening commodity prices will be keenly watched by analysts.

The MPC will begin a three-day meeting on August 3 where it is expected to again raise the repo rate to tame inflation, above 6 per cent since January.

In April and May, the interest rate setting panel raised the benchmark rate cumulatively by 90 basis points and it now stands at 4.90 per cent. Though it is forecast to revise the repo rate upwards, economists differ on the amount of the hike.

On the lower end, the expectation is that the MPC may raise the repo rate either by 25 or 35 basis points while on the other side, it is felt that the rates may be jacked up by 50 basis points. An increase of 25 basis points will take the rate to the pre-pandemic level of 5.15 per cent.

A marginal reduction in June retail inflation to 7.01 per cent from 7.04 per cent in the preceding month and the recent softening of commodity prices have led to questions on whether the panel will continue with the front-loading of interest rate hikes or dial down the speed so that growth is not hit unduly.

For instance, benchmark Brent crude was trading at around $120 per barrel in June —when the RBI had raised the repo rate by 50 basis points. It is now ruling at around $104 a barrel.

Softness is also been seen in freight rates during this month. Despite another round of rises in long-term contracted ocean freight rates across key global trade corridors, month-on-month growth is slowing — and spot rates continue to weaken — suggesting prices may have peaked.

"Most economies are passing through different intensity of inflation. The Western countries are facing much severe inflation whereas in India, the scare is not as bad. Most governments and central banks are aware of growth sacrifice in order to tame inflation, and so far, taming inflation continues to remain the priority.”

“The US Federal Reserve and the Bank of England are likely to tighten more aggressively, whereas for RBI, the relative magnitude would be lesser as drivers for inflation seem to be calming,’’ Akhil Mittal, senior fund manager, Tata Mutual Fund, said.

Mittal sees the terminal repo rate, when the hikes are stopped, going up to 6-6.25 per cent and the MPC opting for a long pause. There are other economists who see the terminal rate at 6.50 per cent.

A Motilal Oswal report that was released recently said that a comparison of 10 emerging market economies shows that the cumulative hikes of 130 basis points in the effective policy rate — comprising the standing deposit facility rate and the repo rate hike — by the RBI in the past three months are among the highest and the fastest.

The RBI had introduced SDF in April to absorb liquidity without any exchange of collateral such as government securities.

External risks

Upasna Bhardwaj, chief economist, Kotak Mahindra Bank, expects a 50 basis point hike. She said there were early signs of inflation moderation, but external sector risks remain. The RBI should frontload the rate hikes to offset the increasing pressure on the rupee.

Bhardwaj pointed out the overall terminal rate may not be very high. She expects the benchmark rate will be increased another 85 basis points to 5.75 per cent by the end of 2022.

On Saturday, mortgage lender HDFC announced a hike in its retail prime lending rate (RPLR) by 25 basis points. Banks are widely expected to revise upward the loans linked to external benchmark such as the repo and the marginal cost of funds based lending rate(MCLR) after Friday.

Apart from home loan and other borrowers, the upcoming increase also does not give any good news to the real estate sector

Anuj Puri, chairman Anarock group, said that if another repo rate hike takes place, home loan interest rates will enter the ``red zone’’, and there could be at least short-term repercussions on overall housing demand.

He said inflation is now one of the significant risks in real estate.

Increased input costs have already compelled many real estate developers to hike property prices in the first half of2022.

Inflation fall to influence MPC

■ Hikes in the region of 25-35 basis points (bps) or even 50bps

■ A marginal fall in retail inflation in June may influence monetary policy panel

■ Crude rates are falling, along with ocean freight rates

■ Inflation problem greater in the West, so the extent of rate hikes may be more compared to India

■ Analysts see terminal repo rate at 6-6.25%. Rate may go up to 6.50%

■ Realty wary of rate hike