The Reserve Bank of India (RBI) may follow the lead of its global counterparts, including the US Federal Reserve, to raise interest rates for the fourth time in a row on Friday to control stubborn inflation.
The RBI, which has raised the short-term lending (repo) rate by 140 basis points (bp) since May, may raise it again by 50 bp to take it to a three-year high of 5.9 percent , say the experts. .
The central bank had raised the repo rate by 40 bps in May and 50 bps each in June and August. The current rate is 5.4%.
Retail inflation based on the consumer price index (CPI), which had started to show signs of moderation since May, has re-consolidated to 7% in August. The RBI takes retail inflation into account while setting its bi-monthly monetary policy.
The RBI Governor-led Monetary Policy Committee (MPC) is scheduled to begin its three-day deliberations on Wednesday. The tariff-setting tribunal’s decision will be announced on Friday (September 30).
The US Fed offered a third straight rate hike after raising rates by 75bps to take the target range to 3-3.25 percent. The central banks of the United Kingdom and the EU have also bet on rate hikes to control inflation.
Madan Sabnavis, chief economist at Bank of Baroda, said inflation in India remains high at around 7% and is unlikely to come down anytime soon.
“This means a rate hike is taking place. The quantum is what the market would be interested in. While a 25-35bp hike would have indicated that the RBI is confident that the worst of inflation is over, recent developments in the The forex market could trigger a 50bps higher amount to stay on track with other markets to keep investors interested,” he said.
The government has instructed the RBI to ensure that retail inflation remains at 4%, with a margin of 2% on either side.
Dhruv Agarwala, Group Managing Director, Housing.Com, said reducing inflation will remain the RBI’s top concern amid a resilient economic expansion and strong credit growth.
“Any rise in rates would also lead to banks increasing interest rates on home loans. But, we believe the impact would not be significant as demand for real estate remains robust. Demand is only will accelerate even more during this holiday season.” He said.
Global commodity prices have remained volatile after falling from record highs in June.
SBI in a special report said a 50 basis point hike in the repo rate “looks imminent”.
“We expect the peak repo rate of the cycle to be 6.25 percent. A final rate hike of 35 bps is expected in the December policy,” he said.
ICRA Chief Economist Aditi Nayar also expects another “new normal” of 50bps MPC rate hike in September 2022.
With inflation expected to moderate in October 2022, the policy decision in December is likely to be highly data-driven, he added.
