As the Reserve Bank of India's upcoming Monetary Policy review meeting nears, economists have been speculating if and by how much would the central bank hike the repo rates.

CNBC-TV18 spoke to experts to get their views regarding the same. Aditi Nayar, Principal Economist at ICRA Ltd said she believes the RBI will hike rates by 35-40 basis points in the August 5 review meet as the second quarter of the current fiscal will likely be a tough quarter for the current account deficit.

“We think Q2FY23 is going to be a tough quarter for the current account deficit. However we expect things to turn back in the second half of the financial year. So we don’t expect 80-81 on the rupee to become a new normal. We still expect the RBI to hike rates by 35-40 basis points in the August 5 review meet. We are in a data dependent world and so we can always see a slightly bigger hike couple of months down the line if warranted,” Nayar said.

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However, DK Joshi, Senior Director & Chief Economist at CRISIL Limited, said that rising trade deficit number affects the current account deficit and thus the rupee. He expects the Reserve Bank of India (RBI) to hike rates by 50 basis point in the upcoming meeting.

“We are expecting RBI to hike rates by 50 basis points and continue with its frontloading. With the trade deficit rising, the current account deficit rises and the currency becomes more vulnerable because the funding requirements go up. So I think that RBI will go for a 50 basis point rate hike at this juncture.”

Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank, also expects the RBI to continue with its frontloading and hike rates by 50 basis points.

“We believe the RBI should continue to frontload and hence a 50 basis points rate hike should be suitable at this point even though their actual estimates are going to be lower on inflation than what they had projected in the previous policy,” she said.

Four-month trade deficit touches $100 bn with $31 billion spike in July

Regarding pressure on the rupee due to various factors including the spike in trade deficit, Nayar said she doesn't expect Rs 80-81 to be the normal for the rupee.

The July trade deficit at $31 billion has made the current account deficit a serious problem. With this, the four-month trade deficit (April-July period) has touched $100 billion.

At this rate, the merchandise trade deficit can touch $300 billion. India's services exports, such as software plus private remittances hit $150 billion last year. Assuming a 20 percent growth, it will still reach only $180 billion. So a current account deficit of $120 billion this year looks likely.

Foreign portfolio flows or FPI, after being seriously negative till June, have turned mildly positive. However economists are assuming net inflows to be at $60 billion after accounting for FII outlfows. So the $120 billion current account gap can be financed only 50 percent by capital flows. The balance of $60 billion deficit means a monthly deficit of $5 billion and it is this that will pressure the rupee.

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