The Reserve Bank will choose to hike key rates by 0.50 per cent at its next monetary policy review in June to protect medium term economic stability in the face of the uncomfortable inflation situation, a British brokerage said on Thursday.
The central bank will likely revise its inflation estimate to 6.2 -- 6.5 per cent, which is well above the upper end of its tolerance band of 2 -- 6 per cent, according to the economists at Barclays.
It said that the RBI will do a downward review of its FY 23 GDP expansion to 7 per cent from the earlier 7.2 per cent.
The RBI expects to deliver another large interest rate hike in June, as above-target inflation could undermine medium-term economic stability, said Rahul Bajoria, chief economist, adding that the quantum of rate hike can be 0.50 per cent.
The RBI had hiked its key rate by 0.40 per cent in a surprise move on May 4, and Governor Shaktikanta Das has already said that the possibility of another hike at the June review is a 'no-brainer'. Bajoria said 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 and deliver a 0.50 per cent hike in the repo rate in June, taking it to 4.90 per cent, he said, because of the central bank's desire to signal that inflation management remains key to its policy objectives.
A further tightening in liquidity can't be ruled out, the brokerage said, adding that it expects a 0.50 per cent increase in the cash reserve ratio to take the level to 5 per cent in the base case.
The RBI has hiked the CRR Cash Reserve Ratio, or the amount of time 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.