As Fed hike, BoJ policy shift trigger risk-aversion, what would be RBI's next move?

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US Federal Reserve and the European Central Bank (ECB) increased rates by a quarter percentage point this week, which was largely in line with the market expectation. Amid a slightly hawkish tone by both the major global central banks, market participants now shift their focus on the Reserve Bank of India’s (RBI) upcoming monetary policy next month. The European Central Bank (ECB), on Thursday, raised interest rates by 25 bps to its highest level since 2001 to 3.75%.

This was a day after the US Federal Reserve resumed its rate hike on July 26, marking its 11th rate increase. The Federal Open Market Committee (FOMC) raised the benchmark funds rate by 25 basis points (bps) to a range of 5.25% - 5.5%, which is its 22-year high level. Also Read: Hawkish to dovish: Fed softens, RBI contemplates With the RBI keeping the repo rates unchanged at 6.5% in its last two policies, the interest rate differential between India and the US has narrowed down to just 100 basis points.

One basis point is 0.01%. Economists, however, do not expect India’s central bank to change interest rates or even stance in the next policy meet scheduled during August 8-10, 2023. “The RBI may not change interest rates in the upcoming monetary policy meeting.

However, the central bank may raise its inflation forecast marginally for the next quarter," said Madhavi Arora, Lead Economist, Emkay Global Financial Services. Moreover, with domestic inflation likely to stay elevated in the near future, economists expect rate cuts by the RBI to be pushed to next fiscal year. “We expect a repo rate cut by RBI in early FY25," Arora added.