InvestorQ : Is it true that BOFA Securities is expecting the RBI to hike repo rates in India?
Archita Jajjoo made post

Is it true that BOFA Securities is expecting the RBI to hike repo rates in India?

Niti Shenoi answered.
1 year ago

BOFA Securities, the securities and trading arm of Bank of America, expects that higher oil prices could actually push the Reserve Bank of India to hold on to the current levels of repo rates through the financial year FY22. However, BOFA Securities also estimates that the RBI could go to the extent of announcing up to 100-basis points rate hike in FY23, albeit in regular tranches.

According to the report, an increase of $10/bbl in the price of Brent Crude could actually be instrumental in reducing the consumption of oil by approximately 0.4%. However, due to the downstream price effects of crude oil, this could also spike inflation by 0.23% or 23 basis points. Currently the benchmark repo rate has been held at an all-time low level of 4%.

BOFA expects that despite the budget constraints of the government, it could opt to offer some sops in the form of lower excise duty burden on petrol and diesel. In short, there could be some sort of fiscal policy support to gradually rein in oil inflation via cuts in excise duties on oil, which are already among the highest levels of oil taxes in the world.

While the oil tax cut would reduce oil prices by close to Rs.10/litre, it will also expand the central fiscal deficit of the government by 0.6% of GDP. That would mean that the fiscal deficit could touch 7.1% of GDP instead of the budget estimates of 6.5%. BOFA believes that this fiscal deficit would be funded by open market operations or OMOs as higher oil import bill cuts forex intervention costs for the RBI. Forex reserves will limit rupee impact of oil prices.