Stories
RBI Rate Hike Expected But Future Guidance Holds The Real Key
- •Markets have already factored in a 25 basis points rate hike by the Reserve Bank of India, but economists expect up to three or four total hikes.
- •Rising inflation indicators, stronger food prices, and higher Q1 GDP growth drive the immediate expectations for a rate hike.
- •Global real rates are rising, meaning a single rate hike with an unchanged stance could be perceived as dovish and cause capital outflows.
- •Investors will closely watch RBI commentary on fuel inflation impacts and future policy recalibration for normalized real rates.
- •Markets are also looking for liquidity-draining tools such as a temporary CRR or MSS bills to absorb excess market liquidity.
Key Questions Answered
The one-month OIS traded at 5.55 percent on October 6 compared to an average of 5.25-5.3 percent from July to September, while the 10-year bond yield rose 25 bps since September 1 and around 48 bps since the August policy, indicating the market has discounted multiple hikes.
Expectations are driven by faster-moving inflation, a rise in core-core inflation, firming food prices, an expected September CPI acceleration to 5.6 percent, July-September CPI tracking above the RBI forecast, high Q1 GDP growth, and a shrinking earnings growth and inflation differential with the US and other countries.
Market analysts suggest a one-year MSS or CMB bill to soak up Rs 4-5 lakh crore, or alternatively, a temporary cash reserve ratio (CRR) for a couple of quarters if the government resists opening its depleted purse, avoiding the distortions caused by further OMO sales or sell-buy FX swaps.
