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Expect RBI to hike repo rate by 125 bps in next 6 monetary policies starting June: ICICI Bank

economy | Apr 20, 2022 1:30 PM IST

Expect RBI to hike repo rate by 125 bps in next 6 monetary policies starting June: ICICI Bank

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B Prasanna, Head-Global Markets Group, ICICI Bank, told CNBC-TV18, that he expects RBI to raise rates by 125 basis points from June onwards in six policy meetings. He thinks that the repo rate will be at 5.25-5.5 percent a year from now.

Inflation has tightened its grip globally and central banks across the board are eyeing interest rate hikes to tame its effect on the economy. This amid the volatile crude oil prices owing to Russia’s invasion of Ukraine, coupled with soaring commodity costs is only fueling worries.

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To understand what to expect from the Reserve Bank of India as it eyes a hawkish stance, CNBC-TV18’s Latha Venkatesh spoke to B Prasanna, Head-Global Markets Group, ICICI Bank.
Prasanna expects RBI to hike rates from June onwards. He mentioned that ICICI Bank is pencilling in 125 bps rate hikes in the next 6 meetings. He believes the repo rate will be in the range of 5.25-5.5 percent a year from now.
"We had at around 75 basis points before the inflation reading. Now, we have revised it to around 125 basis points of rate hike over the next six meetings, which we think starts in June," he mentioned.
"We don't know, but we all are getting guided by what he said post the policy. So that is the reason why we feel that when inflation expectation is at 7 percent, RBI should at least not think about raising rates till the time it reaches around 5.25-5.50 levels. After that it can look at what the inflation expectation is at that particular point of time and decide whether it wants to hike further or not. So all in all, we think around  5.25-5.50 repo rate is  reasonable to expect a year from now, beyond that will depend upon how inflation moves and how the geopolitical risk pans out," said Prasanna.
He mentioned that liquidity cost has risen in the banking system. He explained that overall increase in deposit rates will depend on factors like CASA.
He said, "What is really going to drive rates going forward - the first point to note is that though the banking system, liquidity is expected to remain in surplus this year and maybe for some part of the next year as well, the cost of this liquidity has sharply increased from 390-399 kind of levels."
"We will have to look at how deposit rates are going to get affected as RBI rate increases happen, but the overall increase in the deposit rates of the banking system will be dependent upon two or three factors; one is the CASA itself," he added.
Prasanna highlighted that there are multiple factors that are not going in favour of bonds this year. Key among them is the evolving outlook on inflation, Federal Reserve’s hawkishness and the change in stance of RBI.
"There are multiple factors that are not going in favour of bonds this year. First is the evolving outlook on inflation itself. RBI has revised its inflation from 4.5 to 5.7 percent. The market was already at 6- 6.2 percent and now with the latest inflation reading coming almost close to 7 percent, all the houses are actually revising their inflation expectation even higher," he said.
Prasanna added, "Second is the Fed hawkishness on the global interest rate cycle, where real yields in the US have recently reached zero from more than 100 basis points negative, and the scorching pace of hikes that the Fed governors seem to be continuously alluding to. Then the third is, the change in stance from the RBI itself."
He said his base case range for the 10-year yield would be 7.5-7.10 percent in the first half of the fiscal year 2023 (H1FY23).
"For 10-year my base case is for it to trade in the range of something like 7.10 to 7.50 for the first half. I definitely do think that it will inch up as we go ahead."
 
Watch the video for the full interview.
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