At its policy review meeting next week, the RBI is expected to boost rates by another 0.40 percent: Report

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 hike at the next review as a "no brainer" given the pressure 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 soyabean and sunflower oil, and lower ATF prices will assist avoid a runaway surge in inflation.

However, it predicted that consumer price inflation will average 6.8% in FY23, much above 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 RBI MPC is expected to raise the policy repo rate by 0.40 percent in June and 0.35 percent in August, according to our forecast. We should point out that, for the sake of standardised steps, the likelihood of delivering a 0.50+0.25 percent boost combination is also extremely significant "According to the research,

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 will be raised to 5.65 percent by the end of FY23.

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

On May 4, the RBI increased the CRR by 0.50 percent to 4% in order 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.