As long as core inflation remains high and the U.S. Federal Reserve keeps raising rates, the Reserve Bank of India may raise its key interest rate to 6.75 percent in 2023.
“Core inflation, which is still above 6%, will now be the primary focus. A few other aspects of inflation have also increased.
Therefore, it is too soon to state that inflation has entered the RBI’s tolerance range.
According to Arun Bansal, executive director & head of treasury at IDBI Bank.
“The RBI will also need to be aware of the weakening of the rupee and the decreasing interest rate gap with the United States…
The likelihood of an increase in the terminal interest rates is still 60% hike to 6.75%.
To combat inflation, the RBI has increased the repo rate with 225 bps since May, to 6.25%. The U.S. Federal Reserve, in contrast, increased interest rates up by 425 basis points to 4.25%-4.50%.
According to the government source, if the Fed raises interest rates above to 5% in 2023. India’s central bank may be forced to do the same.
He anticipates that the Indian rupee will continue to be weak, maybe reaching a new record low as the dollar index prepares to surge once more.
“Another downward movement of 1.00–1.50 rupees could occur in the exchange rate of the rupee to the dollar. We do not anticipate the rupee appreciating significantly, at least not until there is a significant rise in foreign investment in India.” According to Bansal.
The exchange rate was 82.81 to the dollar and was down 11.4% this year.
BOND YIELD IN 2023
Bansal forecasts that the benchmark 2032 bond yield of 7.26% will remain in the range of 7.00%-7.35% in the foreseeable future and rules out the possibility of any significant increases, even if the repo rate rises to 6.75%.
He continued, “Most of the downsides are also priced in.” And any increase in yields following a rate hike will only last a short time. “At those levels, we’ll see renewed buying.”
In 2022, the benchmark bond yield increased by roughly 85 basis points to 7.29%.
Additionally, Bansal anticipates progress in the direction of including Indian bonds in international indexes, which will benefit yields. Value purchases of bonds over 7.30% levels will be beneficial.
He also chooses to add seven-year and fourteen-year bonds to his portfolio, claiming that they are far more alluring than the benchmark note of ten years.