RBI Expected to Front-load Repo Rate Hikes

The Reserve Bank of India is expected to increase the repo rate and further jack up the cash reserve ratio (CRR) to curb inflation, which reached its highest level in eight years in April this year.

Economists are currently forecasting a repo rate of 75 to 185 basis points this year alone, and those who forecast a cumulative increase of up to 265 basis points (bps) over the next 24 months, including RBI's surprise out-of-turn 40bps hike last week. 

Retail inflation rose to 7.79% in April, surpassing the RBI's permissible limit for the fourth straight month. This was well above the consensus estimate of about 7.50%.

FCMs also predict that CRR will rise by 100 basis points in the second half of 2023. The repo rate is currently 4.4%. SBI Chairman Dinesh Kara noted that banks do not expect loan demand to weaken, despite rising interest rates.

Inflation concerns and the appreciation of the US currency weighed on local currencies, pushing the rupee down from its initial rise, dropping five paisas against the dollar on Friday to a new closing price of 77.55.