MUMBAI:  Several fund managers and analysts predict that the Reserve Bank of India's (RBI) rate-setting committee would increase the repo rate by 25 to 50 basis points during the monetary policy meeting scheduled for August 3 - 5.

Fund managers and economists share opinions on the direction of the policy. Few people believe that the position will change to "Neutral," but some believe that the withdrawal of the accommodative stance may continue.

In the August policy review, we anticipate a 40–50 bps increase in the repo rate. Withdrawal of the accommodating approach might continue, according to economist Vivek Kumar of QuantEco Research.

\In its latest two policies, the central bank increased the rate by a total of 90 basis points in May and June because of rising inflation that had been consistently above the RBI's upper tolerance zone.
Levels on the bonds will also follow the movement in crude oil prices and US Treasury yields.

Participants anticipate that when the central bank raises interest rates, the yield on government bonds would climb further by 15-20 basis points from the current level.

Markets are likely to be volatile reacting to every development because the long end of the curve is pricing in rate pause or rate reversal while the shorter end of the curve is pricing aggressive rate rises leading to curve flattening.

In last two policies, the central bank has hiked the rate by a total of 90 basis points in May and June, citing high inflation, which was breaching RBI's upper tolerance band for consecutive months. "25-35 base point of repo rate hike. The stance may switch to neutral. Guidance may be somewhat more comforting than previous policy given some correction in commodity prices and range-bound crude oil prices," said Mahendra Jajoo, CIO, Fixed Income at Mirae Asset Investment Managers.

It is anticipated that the forthcoming policy will be range-bound unless there is a surprise element in the policy announcement because bond markets have essentially priced in rate hikes, Jajoo said.
In the meantime, many predict that the RBI may interfere in the currency market to prevent excessive volatility without having any specific levels in mind.

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