With the US Federal Reserve delivering a 75 basis points rate hike for the third time in a row this month, a 35-50 basis points increase in the repo rate by RBI’s six-member MPC is all likely this Friday, said a few analysts who felt that the same is being priced in by the market.
Any commentary on how the RBI deals with rupee fluctuations would be keenly followed, so would be the interest rate outlook, analysts said.
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Deepak Jasani, Head of Retail Research at HDFC Securities said the market is more or less factoring in a rate hike. He said investors would be eager to know how the central bank manages the ongoing volatility in the rupee and the tools it may use going ahead. “Investors would also look for any indication that give them an idea of whether it is the last rate hike or more such hikes are in the offing,” Jasani said.
Inflationary fears are outweighing recessionary concerns globally. The steep hike in interest rate by the US Fed this month came, even as the world’s largest economy is finding itself in a technical recession. This has raised fears of a synchronised global monetary-tightening cycle.
At home, the August CPI print crawled back to 7 per cent from 6.7 per cent in July, above the RBI’s comfort zone, after remaining sticky at about 7 per cent in May-June period.
Emkay Global said the consistently increasing market re-pricing of the US Fed since Jackson Hole, the hot August US inflation print, and the Fed’s own terminal rate projections out-doing the upwardly repriced money market expectations, have followed a carnage in risk asset classes, with emerging markets bearing a disproportionate hit.
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It noted the RBI MPC’s August minutes were read as “relatively-balanced” by domestic market participants but the world order has changed substantially since the last MPC policy review in early August.
“The market has already discounted a 50-bp hike in rates and, therefore, that will not have any negative impact. The trend in the US market and FPI flows will have more impact on the market,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
D-Street investors would be keenly following the rupee movement, which hit a record low of 81.94 on Wednesday, post the RBI policy review. A fall in the rupee hurts foreign flows. This is evident from Rs 1,654 crore outflows by foreign portfolio investors (FPIs) this month, as of September 28, against massive equity inflows of Rs 51,204 crore in August.
“We expect rupee to trade in the range of 81- 82 per dollar, though the RBI action on Friday and commentary will have a bearing on future movements,” said Sonal Badhan, Economist at Bank of Baroda in a note. The economist said the RBI may revise its inflation forecasts (6.7 per cent for FY23) upward if it expects trends in monsoon and sowing to significantly impact food inflation.
Edelweiss Securities said the RBI’s commentary on liquidity will be keenly watched as LAF surplus has largely vanished.
“The RBI is prioritising macro-stability—inflation, rupee, etc. However, this is likely to weigh on growth as economic recovery remains nascent,” the brokerage said in a note.
The three-day MPC policy review will conclude on Friday.
