RBI MPC meet from Oct 5-7: Will RBI hike the repo rate this time? | Finance News
Will RBI raise the repo rate by 25 bps?
A separate Reuters poll conducted between September 18 and 28 showed that nearly 60 per cent economists expected the MPC to raise the repo rate by 25 bps to 5.50 per cent. A majority of those surveyed also expected another hike in December.
If the RBI raises the repo rate, it would be the first increase since February 2023, when the rate was raised by 25 bps to 6.5 per cent.
Inflation pressures build
Inflation has emerged as one of the main reasons for expectations of a rate hike. Retail inflation rose to 4.82 per cent in August. This was above the RBI’s medium-term target of 4 per cent for the third consecutive month. The rise in prices has been driven in part by higher food and energy costs. Reuters reported that price pressures have also broadened, with inflation rising across a larger part of the consumer basket.
Wholesale price inflation rose to 9.92 per cent in August from 9.78 per cent in July. Higher crude oil prices and geopolitical tensions have added to the inflation risks. The Finance Ministry’s September Monthly Economic Review also flagged high crude prices and geopolitical tensions as risks that could add to imported inflation and put pressure on the rupee.
US, UK and Japan have raised rates
The RBI’s October decision will come at a time when several major central banks have moved towards tighter monetary policy.
The US Federal Reserve raised its benchmark interest rate by 25 bps in September to a range of 3.75-4 per cent. It was the Fed’s first rate increase in three years. As many as 16 of the 18 Fed policymakers indicated that they expected at least one more rate increase by the end of 2026, according to Reuters.
However, expectations for an October hike have since fallen. Reuters reported on Thursday that senior Fed officials, including New York Fed President John Williams and Vice Chair Philip Jefferson, had indicated that the central bank may wait before raising rates again.
The Bank of England kept its benchmark rate unchanged at 3.75 per cent on September 17. The decision was taken by a 6-3 vote. However, the central bank warned that rates could rise if the conflict in West Asia continued to push up energy prices and inflation.
The Bank of Japan (BOJ), meanwhile, raised its policy rate by 25 bps to 1.25 per cent on September 18. The move took the rate to its highest level in 31 years and was approved by a 7-2 vote. The BOJ is also considering further increases.
Rupee, global rates add to pressure
The rupee has weakened by about 6 per cent against the US dollar this year, according to Reuters. The narrowing interest-rate differential with the US has also become a concern, with foreign investors withdrawing money from Indian equities and debt markets, Reuters reported.
Indranil Pan, chief economist at Yes Bank, told Reuters that the RBI may need to respond to the US Federal Reserve’s rate increase because it could be “slightly behind the curve”.
The RBI has also been managing surplus liquidity in the banking system. Governor Sanjay Malhotra said the central bank has tools such as bond sales and foreign exchange swaps to manage excess liquidity and bring overnight rates closer to the repo rate.
What do RBI minutes indicate?
The minutes of the RBI’s August MPC meeting indicated that some policymakers were open to higher rates if inflationary pressures became broader.
This has become more relevant as inflation has moved above the RBI’s target and global energy prices have risen. Reuters reported that the combination of stronger domestic growth, broadening inflation and higher global rates has strengthened expectations of a rate increase at the October meeting.
