The rate hike will be accompanied by a change in the policy stance to "calibrated tightening", the American brokerage has said in a report published ahead of the MPC resolution which is set to be announced on 5 August.
Bofa Securities in its report stated, "In our base case, we now see the RBI MPC hike policy repo rate by 0.35 per cent, taking it to 5.25 per cent (higher than pre-pandemic level), with stance change to calibrated tightening from withdrawal of accommodation."
The brokerage expects RBI to retain its FY23 Consumer Price Inflation (CPI) and real GDP growth forecasts, at 6.7% and 7.2%, respectively.
Easing of inflation could be ‘sooner and faster’
The central bank in its July 2022 Bulletin has said the easing of inflation could be even sooner and faster and the key is the direction of change in inflation – not its level – in these extraordinary times.
The RBI has hiked the rate by a cumulative 0.90% in two tightening moves in May and June, responding to the runaway headline inflation, which has consistently overshot the upper end of the target set for the central bank for many months.
Referring to policy actions since April, when the central bank introduced the standing deposit facility, the brokerage said the central bank has effectively hiked rates by 1.30%.
RBI Governor Shaktikanta Das recently said that headline inflation, which came at 7.04% for April, is appearing to have peaked.
"Our endeavour shall be to ensure a soft landing for our economy where inflation is brought down to closer to the target of 4 per cent over a period of time. At the same time, the growth sacrifice is also within manageable limits," Das said at a banking conclave organised by Bank of Baroda.
The governor said any decision of RBI with regard to liquidity and policy rates always takes into consideration the kind of impact it is going to have on growth and revival of economic activity.
However, in sequence of priorities, RBI's focus currently is on inflation followed by growth, Das said.
Speaking on the flexible inflation targeting framework, Das said the regime has worked very well for the country.
Under the flexible inflation targeting framework, RBI is expected to maintain retail inflation at 4% ( /- 2%).
There is a possibility for the RBI to adopt a more aggressive measure and deliver a 0.50% hike in rates like it did in June, joining some developed market and regional central banks who have sent out more decisive signals.
On the other hand, a 0.25% hike in rates can also not be ruled out, the brokerage said, explaining that MPC could acknowledge that inflation has peaked and there are downside risks to their estimates and there will be measured hikes from here on.
With agency inputs
