RBI may take cues from US Fed, other central banks to raise interest rates

The Reserve Bank of India RBI may take cues from its global counterparts, including the US Federal Reserve, to raise interest rates for the fourth time in a row on Friday to tame stubborn inflation.

The RBI, which has raised the short-term lending rate repo by 140 basis points bps since May, may go for a 50bps increase to take it to a three-year high of 5.9 per cent, according to experts.

The repo rate was raised by 40 bps in May and 50 bps each in June and August. The current rate is 5.4 per cent.

The consumer price index CPI based retail inflation, which had started showing signs of moderation since May, has firmed up to 7 per cent in August. The RBI takes into account retail inflation in its bi-monthly monetary policy.

The RBI Governor-headed Monetary Policy Committee MPC is expected to start its three-day deliberations on Wednesday. The decision was made on Friday September 30 by the rate-setting panel. The US Fed delivered a third consecutive rate hike after it raised the rates by 75 bps to take the target range to per cent. The central banks of the UK and the EU have gone for rate hikes to tame inflation.

Madan Sabnavis, Chief Economist at Bank of Baroda, said that inflation in India remains high at around 7 per cent and is unlikely to come down anytime soon.

This means that a rate hike is given. While a hike of 25 -- 35 bps would signal that the RBI is confident that the worst of inflation is over, recent developments in the forex market could prompt a higher quantum of 50 bps to stay on track with other markets so as to retain investor interest, he said.

The RBI asked them to make sure retail inflation stays at 4 per cent, with a margin of 2 per cent on either side.

Dhruv Agarwala, Group CEO, Housing.com, said that reining in inflation will remain the top priority of the RBI amid robust credit growth and resilient economic expansion.

If a hike in rates happens, banks would increase home loan interest rates. Demand for property remains robust and we are of the opinion that its impact wouldn't be significant. He said demand is going to increase during this festive season.

Commodity prices have remained volatile after falling from historical highs in June.

The SBI said that a 50 basis points hike in repo rate is imminent. We expect the peak repo rate in the cycle to be 6.25 per cent. It said a final rate hike of 35 bps is expected to be made in December.

Aditi Nayar, Chief Economist, ICRA, expects another new normal' 50 bps rate hike from the MPC in September 2022.

She said that the December policy decision is likely to be highly dependent on data, with inflation expected to soften in October 2022.