The Reserve Bank’s rate-setting panel will begin its three-day deliberations on Wednesday amid expectations of another 50 basis point rate hike to control high inflation, in line with similar actions by other major central banks, including the US Fed.
Based on the recommendations of the Monetary Policy Committee (MPC), the RBI had increased the repo rate by 50 basis points each in June and August, after raising short-term interest rates by 40 basis points in an off-cycle decision in May.
The MPC, led by RBI Governor Shaktikanta Das, is expected to meet from September 28-30. The decision will be announced Friday (September 30).
The RBI, which has raised its repo rate by 140 basis points (bps) since May, may again go for a 50 bp hike, pushing the key rate to a three-year high of 5.9 percent, experts say. The current rate is 5.4 percent.
The consumer price index (CPI), based on retail inflation, which started to show signs of moderation in May, rose again to 7 percent in August. The RBI takes retail inflation into account when designing its bimonthly monetary policy.
The US Fed made its third consecutive rate hike after raising rates by 75 bps to bring the target range to 3-3.25 percent. The UK and EU central banks have also hiked interest rates to curb inflation.
In a report, Bank of Baroda said monetary policy will be watched more closely this time, given recent developments in the forex market following the Fed’s rate hike last week. The RBI’s view on all issues will provide the market with guidance on the repo rate, price, growth and inflation forecasts, rupee, liquidity and global view.
“In RBI’s upcoming credit policy, scheduled for September 30, 2022, we expect MPC to raise the repo rate by another 50 bps. We expect rates to rise to 6-6.25 percent,” the report said.
The government has instructed the RBI to ensure that retail inflation remains at 4 percent, with a margin of 2 percent on either side.
Since May, the central bank has raised interest rates by 140 basis points cumulatively to contain inflation. Despite this sharp rise, the RBI expects inflation to remain above its comfort zone and maintains the CPI inflation forecast at 6.7 percent for the current fiscal year.
V Swaminathan, executive chairman of Andromeda Loans, opined that given the rise in rates in other economies, the RBI has no choice but to raise rates.
“Inflation in India isn’t that big of a deal, though, and the magnitude of the increase should be moderated in this light. Mortgage borrowers would do well to investigate fixed-rate loans in these kinds of environments,” he said.
Anuj Puri, chairman of real estate consultant Anarock Group, said that with inflationary pressures evident around the world, many countries have seen successive rate hikes in the recent past.
India is closely intertwined with the global economy and has had to take corrective action to contain inflation, which is driven by both domestic and global factors.
“Despite some inconvenience, a 50 basis point increase shouldn’t seriously hamper home buyer sentiment. Plus, the holiday season is just around the corner. This is a time when developers usually roll out various free offers and offers, and we may even be able to interest rate guarantee plans announced this year,” Puri said.
The rupee rose 37 paise against the US dollar in early trading on Tuesday to 81.30 as the US currency pulled back from its high levels.
Equity benchmark Sensex and Nifty ended slightly lower on Tuesday, tracking losses in metals, banking and financial stocks.