Will RBI go for steep repo rate hike next week? Axis Bank chief economist Saugata Bhattacharya predicts

The Reserve Bank's rate-setting panel will hike the key repo rate by 0.35-0.50 percent at the next week's review meeting, Axis Bank chief economist Saugata Bhattacharya said on Thursday.

A hike of such a quantum will take the repo rate beyond the 5.15 percent level, at which the RBI had begun the ultra-accommodative measures in the face of the COVID-19 pandemic, he told reporters.

It can be noted that the monetary policy committee (MPC) has hiked rates in two consecutive moves in May and June by a cumulative 0.90 percent, taking the repo rate at which it lends to the system to 4.90 percent, in a bid to contain inflation.

Bhattacharya said the MPC will go into the internal surveys like household inflation expectations and consumer confidence while deciding the quantum of the rate hike.

He said the rate hike will be both an attempt to stem inflation expectations, and also one part of it will be a frontloading of actions.

A majority of developed world central banks like the US Fed, which hiked rates by 0.75 percent, and the European Central Bank have also adopted a frontloading strategy because it ups the possibilities of a soft landing for the economy, he said.

Bhattacharya said the RBI is likely to continue the tightening after the next week's hike as well and expects the repo rate to be at 5.75 percent at the end of this fiscal.

He said the headline inflation will continue to breach the 6 percent threshold for many more months and is likely to cool off after spiking in September on a low base.

The average CPI for FY23 will be 6.7 percent, the chief economist said, adding it will come below the 6 percent mark only in March.

He said the ongoing depreciation in the currency is having an impact on inflation given the import reliance and also added that off-late, there has been some softening of the commodity prices.

Bhattacharya also appreciated the RBI's handling of the pressures on the currency by intervening in different ways to ensure a smooth movement of the currency.

The government has been restrained in spending lately, Bhattacharya said, terming it as a "puzzling" aspect which needs to be watched given the growth needs of the economy.

There is likely to be significant fiscal slippage and the fiscal deficit will come at over 9.7 percent for FY23, he said, adding that the receipts from 5G auction front will not help matters as the actual payments are staggered over multiple years.

On the liquidity front, he said the surplus will come down to a manageable Rs 2-2.5 lakh crore by September if the government spending goes up, and may reach neutral by December, he said.

The bank expects GDP growth to come at 7.1 percent for FY23, he said. The wage hike in the IT industry may impact the growth as the profitability for IT companies goes down, he warned.