The Reserve Bank's rate-setting panel on Wednesday started deliberations on the eagerly anticipated monetary policy amidst expectation of 50 basis points hike in order to check inflation and improve foreign capital inflow to curb declining value of the rupee against the US dollar.
The decision of RBI Governor Shaktikanta Das headed six-member Monetary Policy Committee MPC will be announced on September 30.
The central bank has asked the consumer price index to remain at 4 per cent with a margin of 2 per cent on either side, but retail inflation has stayed above the RBI's comfort zone since January, as per the government's tasked with keeping it up with the inflation at 4 per cent.
The inflation was at 7 per cent in August, according to the latest data.
While inflation remains high, the Indian rupee is sliding sharply against the US dollar and is near 82 against the dollar. The rupee depreciation has slowed after the US Fed raised their thrice by 75 basis point each in the recent past. Other major central banks have become aggressive in raising rates.
The RBI, which raised the repo rate by 140 basis points bps since May, may go for a 50bps increase which will take the key rate to a three-year high of 5.9 per cent, according to experts. The current rate is 5.4 per cent.
Industry body Assocham said the hike in policy interest rates by the RBI in the range of 35 -- 50 basis points seems unavoidable, given tighter rates by most central banks, including the US Federal ReserveUS Federal Reserve.
The industry would like to see lower interest rates, but the main challenge is to tackle inflation head-on, so that we have a sustainable growth, said Chamber Secretary General Deepak Sood.
He said that the accommodative stance of the RBI supported by several fiscal measures taken by the government had certainly helped the economy in a multi-pronged manner.
Ramesh Nair, CEO, India and Managing Director, Market Development, Asia, expects that the repo rates will see a rise, as the government is trying to curb inflation levels.
The current repo rates are at 5.4 per cent, with the rate hovering above pre-pandemic levels. Banks have begun raising loan interest levels because of the higher repo rate, he said.
The upcoming festive season will spur sales as developers are expected to offer attractive deals to homebuyers, and this could neutralise the impact of rising home loan rates, he said.
The RBI is likely to come out with measures to shore up foreign capital inflows to check the declining value of the rupee against the US dollar, and also by lowering the value of the rupee against the US dollar. The Indian markets performed better last year, despite the fact that their reserves declined by USD 86 billion to USD 546 billion from their highs last year. The rupee has held well with RBI intervention supporting it in the market.
This is a big contrast to the 2013 taper tantrum crisis when the rupee witnessed significant volatility for a long time. It's suggested that it might be better for RBI to allow the rupee to depreciate a bit, finding its natural balance.
The report said that the RBI has been leaning against the wind and may pay off now with a little bit of leaning with the wind, even though the Dollar Index has risen by 17.1 per cent since the Russia-Ukraine war broke out.
After investing over 51,200 crore in August, foreign investors were slowing down as they invested only Rs 1,386 crore in September. In the last four trading sessions FPIs have pulled out of the Indian equity market by a little over 9,750 crore in the last four trading sessions.