The Reserve Bank of India is expected to raise interest rates today for the third time since the beginning of the current financial year to bring down inflation from above the upper threshold of the central bank’s target since January. The focus shifts to the RBI’s growth and inflation outlook and the tone of the monetary policy path.
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The Monetary Policy Committee (MPC) meeting started on Wednesday, and the RBI Governor Shaktikanta Das is scheduled to announce the Monetary Policy Committee decisions at 10 am.
The RBI had said it was removing the policies introduced as COVID-support, and if the central bank hikes by a minimum of 25 basis points, then interest rates will rise to pre-pandemic levels.
While the hike in policy interest rates is almost certain, analysts and economists have different opinions on the extent of the rate hike. It varies between 25 basis points to 50 basis points.
According to HDFC Bank’s Chief Economist Abheek Barua, the RBI is “likely to take rates above a level deemed ‘neutral’ – which we think is closer to 5.25 per cent – before slowing down or looking at becoming more data dependent in this rate hike cycle.”
While the current retail inflation rate is above 7 per cent, easing of many commodity prices is attributed as a major factor of influence towards a lower inflation trajectory.
If the RBI does hike the policy repo rate on Friday, which is almost certain, it will be the third hike in a row. The central bank started tightening the monetary policy at the beginning of the current financial year. In its off-cycle monetary policy review in May, the RBI hiked the policy repo rate by 40 basis points or 0.40 per cent.
That was the first increase in the policy repo rate in nearly two years. The repo rate is the interest rate at which the RBI lends short-term funds to banks. In its bi-monthly policy review in June, the RBI hiked the policy repo rate by 50 basis points to 4.90 per cent.
India’s central bank is concerned about more than just inflation. In July, the rupee’s value vs the dollar fell to an all-time low of a touch over 80, forcing the RBI to use foreign reserves to stop further damage. India’s trade deficit has also grown significantly.
A separate Reuters report showed the Indian rupee could hit record lows if the RBI decides on a smaller hike.
But on the impact of the RBI decision on the stock markets, Srikanth Subramanian, CEO-Designate at Kotak Cherry, said, “equity markets seem to have discounted a 35-50 bps rise and hence a corresponding rate hike may not result in a big shock, especially on the back of good earnings and economic momentum.”