RBI Certain To Raise Rates Today, The Question Is How Much

The Reserve Bank of India is all set to hike interest rates again on Friday, but expectations were divided on by how much, with 0.5 per cent the most likely outcome driven by elevated inflation, the US Federal Reserve's aggressive stance, and a weakening rupee to new record lows repeatedly in recent days.

A Bloomberg poll showed the RBI's six-member monetary policy committee, which started the deliberations on Wednesday, would raise the repurchase rate by 50 basis points to 5.90 per cent, according to 24 of 35 economists, while a Reuters poll said economists were split between 35 and 50 basis points lift-off.

Governor Shaktikanta Das may adopt a more hawkish tone on Friday than he did at the meeting in August when he promised to do "everything it takes" to reduce inflation, which has remained above 6 per cent in each month this year.

Since then, as the Fed increased rates by 75 basis points for the third time in a row and intensified an aggressive signal while warning of a painful slowdown necessary to control US inflation, India's price increases have accelerated once again, and the currency crisis has gotten worse.

"The biggest point of worry currently is the significant depreciation in the currency," said Upasna Bhardwaj, chief economist of Kotak Mahindra Bank, told Bloomberg. Deteriorating reserves curtail RBI's ability to intervene, so "higher interest rates will have to be maintained with hawkish tone in the policy to support the rupee." 

After hiking the short-term lending rate by 40 basis points in an off-cycle move in May, the RBI increased the repo rate by 50 basis points in June and August based on the recommendations of the MPC.

If the RBI does hike rates by 50 basis points on Friday, it will mark the third in a row.
The consumer price index (CPI), based on retail inflation and had begun to moderate in May, has once more firmed up to 7 per cent in August. When drafting its bi-monthly monetary policy, the RBI considers retail inflation.

In a research note, the Bank of Baroda stated that the monetary policy would be more closely observed this time, given recent movements in the foreign exchange market following the Fed hiking rates last week. 

The market awaits direction from the RBI on the repo rate, policy stance, growth and inflation estimates, rupee, liquidity, and global outlook.

"In the upcoming credit policy of RBI, which is scheduled on 30 September 2022, we expect MPC to raise the repo rate by another 50 bps. We expect rates to increase up till 6-6.25 per cent," the Bank of Baroda report said.