Repo rate may hit 5.75% amid high inflation, says Deloitte expert

The RBI is expected to hike the repo rate to 5.75% and hold it for an extended period due to high food and oil prices, according to Deloitte India's Chief Economist. Another rate hike is possible later this year, depending on inflation prints.

The Reserve Bank of India is likely to take the repo rate to 5.75 per cent and then maintain it at that level for an extended period, as elevated food and oil prices are expected to keep inflationary pressures high, said Rumki Majumdar, Director and Chief Economist at Deloitte India.

Repo Rate Hike on the Cards

Majumdar said the RBI could consider another rate hike in the coming months, with the timing likely to depend on inflation prints for October and November. She said the central bank is likely to assess these numbers before deciding whether to move again in December or defer the move.

"Most likely 5.75 is what we are expecting unless situation really deteriorates, which we do not expect," Majumdar said, adding that the policy rate could remain at that level for a longer period.

She said the RBI's latest 25-basis-point hike was a prudent and pre-emptive measure amid rising inflation, pressure from rate hikes by Western central banks, capital outflows and rupee depreciation.

Inflationary Pressures to Remain High

Majumdar noted that WPI inflation has remained close to 10 per cent for four months and said the rate hike would help contain inflation, which are important for household purchasing power and future spending decisions. She expects food prices to remain elevated for some time, although they could start easing as the impact of El Nino subsides and crop output improves. Oil prices, however, are likely to remain high due to disruptions around the Hormuz and Bab el-Mandeb routes.

Impact on Bond Yields

On bonds, Majumdar expects Indian government bond yields to rise gradually, with the 10-year yield already around 7.1-7.2 per cent. Higher yields, she said, could help maintain India's risk premium, attract capital and balance pressure on the rupee. "It will not be as sharp as what the West has seen but a higher yield helps because it kind of ensures that the risk premium that India offers remains high," she said.

Festive Consumption and Sectoral Impact

Despite higher rates and food inflation, Majumdar does not expect festive consumption to weaken significantly, saying strong consumer spending and a pre-emptive RBI action could support confidence and make spending "more expansionary than conservative".

For interest-sensitive sectors such as automobiles and real estate, she expects the impact of higher rates to emerge with a time lag as banks gradually adjust lending rates. Strong credit growth could also cushion the impact, while consumers may increasingly consider fixed-rate loans and more attractive bank deposits. "Consumers will likely continue with the spending, be mindful of what rates they go for," she said. (ANI)

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