RBI must normalize policy and hike rates

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With the US Federal Reserve adopting a more aggressive monetary policy and targeting interest rate hikes this year, the Reserve Bank of India will soon have to consider normalizing domestic policy or risk seeing foreign capital drain out of the country.

The Reserve Bank of India is likely to follow global trends and raise interest rates, however, it is unclear when this would happen. Some experts believe the RBI will heed global cues and move quickly, while others believe it will wait and see.

According to the minutes of the December Fed meeting released last week, the US Fed is expected to raise interest rates sooner than expected and begin reducing its overall asset holdings.

Once domestic interest rates start to rise, we should expect four to six rounds of raises. It might be anywhere between 100 and 150 basis points. However, this is dependent on the rate of inflation. If international inflation, that is, inflation in the industrial world, becomes very sticky and persists for a long period, interest rates could rise by more than 100 basis points…,” said NR Bhanumurthy, economist and Vice-Chancellor of the Dr. BR Ambedkar School of Economics University.

 When asked when the rate hikes would happen, he said it’s difficult to say whether they’ll happen in the calendar year or the financial year.

We should expect four to six rounds of interest rate hikes once domestic rates start to rise. It could be in the range of 100 to 150 basis points. This, however, is subject to the rate of inflation. Interest rates could rise by more than 100 basis points if international inflation, that is, inflation in the industrial world, becomes very sticky and persists for a long time…,” stated NR Bhanumurthy, economist and Vice-Chancellor of the Dr. BR Ambedkar School of Economics University.

When the RBI decides to raise interest rates, expect the interest rate cycle to increase by 100 to 150 basis points, according to Bhanumurthy. Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank, believes the RBI would raise the repo rate as early as August and reverse it between February and April. By the end of FY2023, she expects a 50-basis-point hike in the repo rate and a 90-basis-point increase in the reverse repo rate.

Madhavi Arora, Lead Economist at Emkay Global Financial Services, on the other hand, does not expect RBI to react forcefully to Fed activities, predicting a reverse repo rate hike in April.

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