RBI to make larger, 0.50% rate hike in June

The Reserve Bank will make a larger, 0.50 per cent hike in key rates at its next monetary policy review in June to protect medium term economic stability in the face of the uncomfortable situation, a British brokerage said on Thursday.

The central bank is expected to revise its estimate to 6.2 -- 6.5 per cent, which is well over the upper end of its tolerance band of 2 -- 6 per cent, according to the economists.

On the growth front, it said that it will do a downward review of its FY 23 GDP expansion to 7 per cent from the earlier 7.2 per cent.

We expect the hike to deliver another large interest rate hike in June, as above-target could undermine medium-term economic stability, according to Chief economist Rahul Bajoria, who said the quantum of rate hike can be 0.50 per cent.

The key rate was raised by 0.40 per cent in a surprise move on May 4, and Governor has already said that the possibility of a hike at the June review is a no-brainer as Bajoria said that his calculation of higher threshold inflation and lower trend inflation could give RBI some room to look through the current inflation spike.

He said the RBI's main challenge is to balance upside risks to inflation with downside risks to growth.

The RBI will stay the course, given the central bank's desire to signal that inflation management remains key for its policy objectives, and take it to 4.90 per cent in June, he said, adding that the six-member rate setting panel will take the decision unanimously.

The brokerage said a 0.50 per cent increase in the base case will be necessary to take the level to 5 per cent, despite the fact that a further tightening in liquidity can not be ruled out.

The RBI has hiked the CRR Cash Reserve Ratio, or the amount of time deposits banks have to park with RBI, by 0.50 per cent, to suck out an additional Rs 87,000 crore from the system, according to the May 4 review.