RBI likely to raise policy rates on Friday

MUMBAI: The Reserve Bank of India’s (RBI) monetary policy committee may raise policy rates by 25 basis points on Friday, for the third time this year, along with a change in stance to hawkish, amid surging crude oil prices and weakening rupee. Of the 15 economists surveyed by Mint,14 expect RBI to raise repo rate, the rate at which it lends to commercial banks, to 6.75%. Only one economist expects a 50 basis points hike to 7%.

One basis point is one-hundredth of a percentage point.

Since the last policy in August, the upward pressure on RBI’S 4% inflation target has increased with rupee depreciating by 5.5% and oil prices rising by 13%. In addition, customs duty has also been raised on goods worth $12 billion. This, even as consumer inflation has remained lower than RBI estimates and core inflation momentum has slowed down.

“We expect the RBI to emphasise on the forward-looking nature of monetary policy, as high oil prices and a weak rupee, risk hardening inflationary expectations and disrupt the benign inflation outlook. External challenges stem from US monetary policy normalisation, just as oil prices are rising sharply. At home, volatile financial markets have kept the rupee at record lows. For the rupee credit markets, spillover worries from a domestic non-bank financial institution’s default continues to hurt risk-appetite,” said Radhika Rao, economist at DBS.

In the previous policy, MPC members reasoned that inflation will increase in the second half of the year, given uncertainties around the implementation of the minimum support price (MSP) and crude oil prices. Accordingly, RBI revised its consumer inflation projection for the second half to 4.8% from 4.7%. RBI expects it to further rise to 5% in the first quarter of next fiscal. Economists expect RBI to wait for clarity in MSP hike increase before revising the inflation target upwards.

While a rate hike is unanimous next week, majority of economists expect at least one more rate hike before the end of fiscal year 2018-19. MPC members in the minutes of August policy meeting had expressed concerns about meeting the medium term inflation target of 4%.