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Balancing growth and inflation: RBI likely to hike rates by 35 bps, change stance to 'neutral'

Since the last monetary policy, inflation has come in lower at 6.8 percent for October. Sequential momentum in WPI has been falling consistently. Inflation is likely to come within the RBI’s target band by Q1FY24.

December 06, 2022 / 06:53 PM IST


Deepak Agrawal, Chief Investment Officer (Debt Fund) at Kotak Mahindra Asset Management Company

Since the outcome of the last Reserve Bank of India (RBI) policy in September 2022, the US Federal Reserve has hiked interest rates by 75 basis points (bps) and is likely to raise rates by an additional 50 bps in December 2022. The recent comments by US Federal Reserve Governor Jerome Powell were relatively less hawkish compared to the views expressed by other Fed governors, and the terminal rate expectation has been reduced from 5-5.25 percent to 4.75-5 percent.

In spite of the rate hike in the US in November 2022 and the incremental rate hike expected going ahead, the Dollar Index has fallen from 112 levels to 104.50 as on December 2, 2022. US 10-year yields have fallen from 3.8 percent level to 3.5 percent and the 2/10-year interest rate yield curve has further inverted from 40 bps to 80 bps.

The inverted interest rate yield curve suggests that the rate hike cycle in the US would be shallow. The USD-INR has also appreciated from the low of 83 per dollar seen in mid-October. The Financial Stability risk has also receded recently and the need for rate hike to manage the same has also reduced.