The Reserve Bank of India (RBI) could be guided by its global counterparts, including the US Federal Reserve, to hike interest rates for a fourth consecutive day on Friday in a bid to tame stubborn inflation.
The RBI, which has hiked the short-term lending (repo) rate by 140 basis points (bps) since May, may target another 50 bps hike to take it to a three-year high of 5.9 percent, experts say.
The central bank raised the repo rate by 40 basis points in May and by 50 basis points in June and August. The current rate is 5.4 percent.
Retail inflation, based on the consumer price index (CPI), which has shown signs of slowing since May, firmed again in August at 7 percent. The RBI takes retail inflation into account when framing its bi-monthly monetary policy.
The Monetary Policy Committee (MPC), led by the RBI governor, is scheduled to begin its three-day deliberations on Wednesday. The Rate Setter’s decision would be announced on Friday (September 30).
The US Federal Reserve made the third straight rate hike after raising rates by 75 basis points to bring the target range to 3 to 3.25 percent. The UK and EU central banks have also raised interest rates to tame inflation.
Madan Sabnavis, chief economist at the Bank of Baroda, said inflation in India remains high at around 7 percent and will not fall anytime soon.
“That means there is a rate hike. The quantity is what the market would be interested in. While a 25-35 basis point hike would have signaled that the RBI is confident the worst of inflation is over, recent developments in the FX market could prompt a higher 50 basis point quantum to stay on course with other markets, to keep investors interested,” he said.
The government has mandated the RBI to ensure retail inflation remains at 4 percent, with a 2 percent margin either side.
Dhruv Agarwala, Group CEO, Housing.com, said containing inflation will remain the RBI’s main concern given robust economic expansion and credit growth.
“Any rate hike would result in banks raising rates on home loans as well. However, we believe the impact would not be significant as demand for real estate remains robust. Demand will only accelerate during this festive season. ” he said.
Global commodity prices remained volatile after falling from historic highs in June.
SBI said in a special report that a 50 basis point hike in the repo rate is “imminent.”
“We expect the highest repo rate in the cycle at 6.25 percent. A final rate hike of 35 basis points is expected in December policy,” it said.
Aditi Nayar, Chief Economist, ICRA, also expects another “new normal” rate hike of 50 basis points from the MPC in September 2022.
With inflation expected to ease in October 2022, December’s policy decision is likely to be highly data-driven, she added.