The Monetary Policy Committee (MPC) is expected to unanimously decide to raise the policy repo rate by 50 basis points (bps) at its upcoming meeting in order to rein in above-target inflation and address currency concerns. If the MPC votes for a 50 basis point increase in the repo rate (the interest rate at which banks borrow cash from the RBI to address short-term liquidity imbalances) on September 30, it will be the third time in a row. The repo rate is currently 5.40 percent.
As retail inflation rises from 6.70% in July to 7% in August, it is already above the upper tolerance level of 6%, and the Indian rupee depreciates (it surpassed 81 to the USD mark twice last week), a 50 basis point repo rate hike may be required.
However, due to the drop in industrial output growth rate to a four-month low of 2.4 percent in July, compared to 12.7 percent in June, economic growth may require support in the form of a delay or a lower repo rate hike. Even as the US Fed delivered jumbo-sized hikes of 75 basis points each in its last three meetings to stamp out decades of high inflation, the rupee has weakened by about 2.21 percent (or by 1.755 per dollar) between the MPC’s last meeting (August 5 close: 79.235) and till date (last Friday’s close 80.99).
According to Madan Sabnavis, Chief Economist of Bank of Baroda, inflation remains high at approximately 7% and is unlikely to fall anytime soon.”This suggests that interest rates will be raised…While a rise of 25-35 basis points would have suggested that the RBI is satisfied that the worst of inflation is behind, recent developments in the FX market may necessitate a higher quantum of 50 basis points to keep on track with other markets and retain investor confidence,” he said.