The Reserve Bank of India (RBI) is likely to raise the repo rate by 25 basis points in December, not 50 bps, according to an SBI Research report. The report revised its earlier forecast, citing signs of easing inflation, currency and global pressures.
SBI Research sees a 50 per cent probability that the terminal repo rate could fall from 6 per cent to 5.75 per cent.
Consumer Price Index (CPI) inflation reached 6.09 per cent in October, crossing the RBI’s upper tolerance limit of 6 per cent for the first time in the new series. The report expects inflation to remain above 6 per cent in November before declining.
“Recent developments indicate that the balance of probabilities has decisively shifted towards a 25-bps rate hike in December, rather than a larger 50-bps adjustment,” the report said.
The report noted that the RBI’s steps to manage rupee volatility had helped the currency recover below Rs 94 against the US dollar. Liquidity conditions have improved too, with the call rate falling below the Marginal Standing Facility (MSF) rate of 5.44 per cent.
A recovery in capital flows and foreign institutional investor (FII) investments should further support the rupee. FII inflows have reached around $7.65 billion since November 6.
SBI Research expects crude oil prices to moderate, with prices averaging around $87. It cited an 11 per cent fall in crude prices since the US election and the possibility of de-escalation in the US-Iran conflict.
The report expects US 10-year Treasury yields to move towards 4.75 per cent and Indian 10-year yields to settle between 6.75 and 7 per cent.
It expects the December hike to be followed by a data-dependent policy approach, rather than another increase in February, ahead of the Union Budget.
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