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We expect the Reserve Bank of India’s Monetary Policy Committee to increase the repo rate by 35 basis points at its meeting on September 30.
The Fed continuing to raise rates, domestic consumer price index inflation still hovering ~7% and high-frequency indicators continuing to signal steady growth momentum will support sustained rate hikes by the RBI.
With the repo rate expected to be ~5.75% and tightening domestic liquidity already beginning to put pressure on short-term rates, we expect the RBI to drop the line ‘focused on withdrawal of accommodation’.
It may also indicate ‘near neutral’ rates and opt for state-based guidance. However, the RBI will keep its options open given the aggressive stance adopted by the Fed.
In our view, persistently tight liquidity will not be consistent with the current stance of the RBI and hence it is likely to indicate its willingness to support liquidity through open market operations purchases, as and when the need arises.
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