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We expect that the RBI will hike the Repo rate by another 35-40 basis points in the June meeting. However, we will not be surprised if they prefer to go slow on rate hikes given the government is also responding to the inflation risks. The recent announcement on fuel tax cuts and reduction of import duties on edible oils will provide some comfort to the RBI.
RBI’s surprise hike in CRR rate at the start of the month has fuelled an expectation of a further hike in CRR rate in the June policy. However, surplus liquidity in the banking system has fallen sharply in the last three weeks. Currently, the net excess liquidity parked under the RBI’s LAF window is close to Rs. 3 trillion. We believe, the RBI will be comfortable with this level of liquidity at this juncture. So, it may keep the CRR rate unchanged.
The bond market is already positioned for frontloaded rate hikes. The broader market expectation is that the RBI will hike by around 40-50 basis points in the June meeting. Any smaller rate hike will be a positive surprise and short term bond yields may soften marginally.
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