InvestorQ : What can we broadly expect from the monetary policy to be announced by the RBI on 08th June 2022?
Moii Chavate made post

What can we broadly expect from the monetary policy to be announced by the RBI on 08th June 2022?

Tisha Malhotra answered.
4 weeks ago

Here are some of the major expectations that you can look forward to from the monetary policy to be announced on 08-June when the 3 day MPC meet comes to an end.

· It is very likely that the RBI would hike repo rates by 35-50 basis points in the June policy as it would then take the cumulative rate hike in May and June to around 80 bps. There is a lot of ambiguity of what the actual rate hike could be although it veers to 40 bps.

· Rate hike in June is not about whether but about how much. With April CPI inflation at 7.79% and the WPI inflation at 15.08%, the wiggle room to wait longer is limited. For now, the RBI is holding to its median inflation target of 4%.

· The US Fed is also a bit too hawkish for comfort. For example, in the last 2 meetings, the Fed hiked rates by 75 bps and has already guided another 200 bps rate hike by end of 2022. Too much divergence would mean capital outflows from India.

· Pre-COVID repo rates were at 5.15%. Assuming that the RBI raises rates by another 40 bps in June, then the repo rates would still only come to 4.80%, which is 35 bps short of the pre-COVID repo rate. That is what the RBI governor has been targeting.

· There is a lot more ambiguity on the CRR hike front. With the VRRs successfully soaking liquidity and the previous CRR hike of 50 bps soaking Rs87,000 crore, RBI is expected to go slow on CRR. Perhaps 25 bps CRR hike is more likely, but you never know if the RBI wants to go the whole hog in inflation control.

· The big change that is expected in the monetary policy on 08th June is the hike in inflation expectations. Now here is a quick background. In the April 2022 MPC meet, it had had increased the inflation estimate for FY23 by 120 bps from 4.5% to 5.7%. Now, the fear is it could go up by another 80 bps to 6.50%.

One more thing you can expect from the monetary policy is the more elaborate guidance on government borrowing program. Government hinted at another Rs100,000 crore borrowing to fight inflation. Fiscal deficit is already pegged to spike from 6.4% to 6.9%. One thing to look forward is the modified borrowing program of the government in H1 and H2; and that will have a bearing on the benchmark yields.