What do you expect from the June monetary policy of the RBI? Will there be another rate hike?

Ahead of the monetary policy announcement in early June, a note from Barclays has painted a rather hawkish picture of the RBI stance. According to the Barclays note, RBI was likely to hike repo rates by 50 basis points to 4.90% to check the surge in inflation. In addition, Barclays also expects the RBI to hike CRR by 50 basis points to 5% while raising the inflation estimate for FY23 to more realistic levels of around 6.5% for the full-year.

Barclays expects that the inflation estimate of the RBI would be well above the upper tolerance limit of 6% as laid out by the RBI as the worst case scenario. However, median inflation rate is expected to stay around 4%. RBI may also reduce the outlook for GDP growth by 20 bps to 7% for FY23. However, even if the rates are hiked by 50 bps, the eventual rates would still be about 25 bps below the pre-COVID levels.

However, in practice, RBI may not have such an easy decision to make. Here is why.

· On the one hand, SBI Research estimates India GDP growth for Q4FY22 at just about 2.5%, which may be a shocker. That data will be out before the policy.

· Also the US GDP growth may have been negative in the March 2022 quarter and that will put pressure on the Fed to calibrate further rate hikes. At least, the language of the Fed would taper. For now, the focus will be on the PCE inflation on 27th May.

· Government borrowings amidst rising yields is another issue. Annual borrowing target stands at Rs14.3 trillion for FY23 and it could be possibly hiked by another Rs1-2 trillion to take care of inflation control measures. That cannot happen with higher yields.

· High rates are starting to pinch private sector borrowers too. NABARD just cancelled its Rs5,000 crore bond issue due to high yields. HDFC has been going slow on borrowing plans. Clearly, not all are happy with higher bond yields.