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With falling commodity prices, domestic inflation concerns have eased somewhat. But external environment is turning extremely hostile with sharply rising Dollar and volatile financial markets.

We expect, the RBI will maintain a hawkish tone with particular focus on the external risks. It may hike the policy rate by 35-50 basis points in this meeting while keep the room open for further hikes if global rates continue to move higher or inflation does not soften.  

Bond market is already pricing for upto 50 basis points rate hike. From market perspective, RBI’s guidance on liquidity management will be more important in this meeting. As the liquidity condition is turning into deficit, market is expecting OMO purchases to add liquidity and to support the bond market in the second half. Given the tightening policy direction, the RBI may disappoint the market on OMOs.