At next week’s scheduled monetary policy review, the Reserve Bank is projected to boost rates by 0.40 percent, according to a foreign brokerage. According to the report by Bofa Securities, the central bank’s rate-setting panel will follow it up with a 0.35 percent hike in rates at the next review in August or split it into a 0.50 percent hike next week and a 0.25 percent hike in August, bringing the total quantum of rate hikes to 0.75 percent.

The Reserve Bank of India (RBI) raised interest rates by 0.40 percent on May 4, and Governor Shaktikanta Das has already described a rate rise at the next review as a “no brainer” given the need to keep inflation within the target band of less than 6%. According to the brokerage’s assessment, due to a strong spike in tomato prices, headline inflation for May is expected to be 7.1 percent.

The research stated that measures such as reduced excise duties on gasoline goods, duty-free imports of crude soybean and sunflower oil, and lower ATF prices will assist avert a runaway surge in inflation. However, it predicted that consumer price inflation will average 6.8% in FY23, much over the RBI’s tolerance ceiling of 6%. The central bank will raise its forecast for FY23 from 5.7 percent to 6.5 percent, according to the statement.

The important thing is that the RBI MPC departs ultra-accommodation by August and returns the policy repo rate to 5.15 percent, where it was before the epidemic, it said, adding that if inflation remains high after that, the repo rate would be raised to 5.65 percent by the end of FY23.

As the central bank works to normalize liquidity conditions by reducing surplus stock, the Cash Reserve Ratio (CRR), or the ratio of demand deposits held by lenders with the RBI without any return, is expected to rise further by 0.50 percent, according to the brokerage.

On May 4, the RBI increased the CRR by 0.50 percent to 4% to drain Rs 87,000 crore of liquidity from the system. In terms of growth, the brokerage maintained its forecast of 7.4% real GDP growth in FY23 and stated that the RBI’s forecast of 7.2 percent will also be maintained.

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