RBI MPC Meeting: All eyes of the market are on the meeting of Monetary Policy Committee i.e. MPC of Reserve Bank of India (RBI) to be held on 7th October. There was no change in the interest rate for a long time, but now the economic situation is changing. Experts believe that the central bank may increase the repo rate by 25 basis points today. If this decision comes, the repo rate will directly increase to 5.5 percent. This will be the first time since February 2023 that the central bank will raise interest rates. The decision is already being anticipated in the market, so experts say the rate hike alone will not be a big deal, but what the RBI signals for the future will be more important.

Interest rates may increase

Many market experts have already predicted that this time the central bank may take a drastic step of raising the rate by 25 basis points. The MPC has kept rates unchanged for the past several meetings. If there is an increase of 25 basis points today, the repo rate will be 5.5 percent. This decision will have a direct impact on the pockets of common people and the entire banking sector. However, the market has already largely accepted this potential increase. Hence, analysts want to see what roadmap the RBI lays out for the future. Some experts believe that the central bank may signal another rate hike in the future. On the other hand, there are mixed views on whether the RBI will decide to change its current neutral stance.

Challenges related to inflation rate

The biggest reason behind this strict stance of RBI is the latest inflation figures. In its last review, the central bank projected retail inflation (CPI) at 5 percent for fiscal 2027. But the numbers have been seen going up in recent months. Retail inflation was 4.45 percent in July which increased to 4.82 percent in August. Markets are now watching whether the RBI makes any changes to its annual inflation forecast. Some analysts believe that inflation estimates may rise. If the impact of higher prices of raw materials and commodities spills over to other daily commodities, inflationary pressures may increase further.

Current pace of economic development

The faster pace of the economy has certainly provided some relief amid inflationary worries. In the first quarter of the current financial year, the Indian economy performed better than expected and registered a strong growth rate of 7.8 percent. Despite this, some challenges are clearly visible in the second half of the year. Tightening financial conditions worldwide and higher crude oil prices may affect the growth rate in the coming days. In such a scenario, the RBI will have to ensure that the impact of the interest rate hike does not slow down this strong economic momentum.

Excess cash in the banking system

Apart from the repo rate, managing the excess cash i.e. liquidity present in the banking system is also a major issue for the central bank. In the month of September, the liquidity of the banking system reached about 12 lakh crore rupees. The central bank then tried to balance it through OMO sales and VRRR operations. Due to this, this cash came in the range of about 4 to 6 lakh crore rupees. According to the information, a liquidity surplus of Rs 5.03 lakh crore was recorded in the banking system on October 6.