RBI may raise policy rate by 25 bps on Aug 1
MUMBAI: The Reserve Bank of India (RBI)’s monetary policy committee (MPC) may raise policy rates by 25 basis points (bps) on Wednesday but is expected to maintain its neutral policy stance, given the volatility in crude oil and food prices, economists say.
Of the 15 economists surveyed by Mint, 12 expect RBI to raise its repo rate, the rate at which it lends to commercial banks, to 6.5%. Only three economists expect the central bank to keep rates unchanged at 6.25%.
Since the last rate hike in June, food and consumer price inflation have surprised to the downside, while core inflation has accelerated. Consumer price inflation quickened to 5% in June, slower than the 5.3% consensus estimate of economists, but faster than the 4.87% pace in May. Core CPI, excluding food and fuel, accelerated to 6.4% from 6.2% in May, adding to RBI’s concerns. While global crude prices have declined, they are still hovering above $70 per barrel, which could push the CAD wider.
The previous policy cited uncertainties around the implementation of minimum support price (MSP) as one of the factors that could stoke inflation. With the centre announcing a doubledigit increase in MSP, economists believe that its impact on inflation could be limited as much of it depends on its implementation. Economists believe that risks to the medium-term inflation target of 4% have increased, warranting a rate hike.
“With real rates less than MPC’s preferred range of 175bps, we believe a hike will reaffirm its commitment towards inflation targeting framework and play a key role in reducing risks to macroeconomic stability amidst several global uncertainties,” said Anubhuti Sahay, senior economist at Standard Chartered Bank. While a rate hike is almost unanimous, many economists believe that RBI will maintain its neutral policy stance and wait to assess the impact of monsoon and fiscal developments before changing its stance.
The majority of economists expect one more rate hike before the end of the fiscal year. But some believe that RBI will pause as growth and inflation peak off in the second quarter.