The Reserve Bank of India (RBI) is likely to hike key rates, concentrating more on inflation than on growth, according to some economists. They stated that more restrictive steps will be implemented. The RBI’s rate-setting panel began its three-day talks on Monday to finalise the next monetary policy statement, and the policy outcome will be released today.

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Many economists predicted that the key interest rate will be raised at the forthcoming policy meeting. While some expect a range of 35 to 50 basis points (bps), others foresee a range of 40 to 50 bps.

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“We expect CPI inflation (to) average around 7.2%-7.3% in H1 FY23  on account of elevated commodity prices, high food and core inflation,” said Swati Arora, Economist, HDFC Bank. 

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While analysts agree that managing inflation is a top priority right now, the RBI is also wary about finding a balance between demand recovery and inflation management, according to economists.

“There will definitely be a rate repo hike. It could either be 40 bps or 50 bps,” added Sarbartho Mukherjee, Economist, Mahindra Group.

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According to the RBI’s Inflationary Expectations Survey, 89.9% of respondents in March 2022 felt that prices will rise in the future, higher than the January 2022 forecast (85.6%).

According to economists, with the CPI and WPI both reaching record highs last month, the RBI is anticipated to raise its inflation target to a reasonable number, such as exceeding 6% for CPI, since the current Ukraine-Russia crisis has an influence on input costs.

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Economists predict a small increase in the cash reserve ratio (CRR) in monetary policy.

“A gradual increase of CRR by 25 bps in the next policy meet can’t be ruled out, depending on the situation, going forward. The liquidity adjustment facility (LAF) corridor has been normalised. So, we don’t expect much change in this context,” stated Sankhanath Bandyopadhyay, Economist, Infomerics Ratings.

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For the time being, economists believe that growth will not be a priority for monetary policy.

“Both RBI and the government are now prioritising inflation control and seem willing to sacrifice some growth, for example, in base metals and wheat exports, to achieve modest inflation,” said Prithviraj Srinivas, Chief Economist at Axis Capital. 

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The RBI’s MPC meeting takes place amid a backdrop of rising inflation and a complicated geopolitical situation, including the Russia-Ukraine war. The RBI raised the repo rate by 40 basis points at a previously unscheduled meeting held from May 2 to May 4. The cash reserve ratio has also been raised by 50 basis points to 4.50%. The last time the RBI adjusted the repo rate before May 2022 was on March 27, 2020, during the first wave of the COVID-19 pandemic.