RBI Repo Rate Hike: An important meeting of the Reserve Bank of India’s Monetary Policy Committee (MPC) is set to begin on Monday, October 5. The decisions taken in this three-day meeting will be announced on October 7. This time the policy interest rate i.e. repo rate is likely to increase by 0.25% (25 basis points). If this happens, the repo rate will increase to 5.50%. Ongoing tensions in West Asia have pushed up crude oil prices in the international market, while poor monsoons have affected crop production in the country. Both these factors have led to a sharp increase in inflationary pressures, leaving the Reserve Bank with no easy option but to raise interest rates.

New inflationary pressures

The situation has changed a lot since the last meeting held in August. The average price of crude oil at that time was $91 per barrel. Prices surpassed $100 in early September. Due to supply disruptions, it reached $113 on September 9. At the end of September, Brent crude closed at $103, well above the Reserve Bank’s estimate of $85.

On the other hand, poor monsoon rains have damaged agriculture. Economists believe that retail inflation may cross the Reserve Bank’s 6% target in the third quarter of the current fiscal. According to Canara Bank Chief Economist Madhavan Kutty, inflation may move to 6.2% to 6.3% in the third quarter due to geopolitical tensions and expensive crude oil. IDFC First Bank estimates inflation at 6.1% in the December quarter and Bandhan AMC estimates it above 6%.

Most economists favor surpluses

20 out of 21 economists polled by ET have agreed that the Reserve Bank will raise interest rates this time. Only one expert has said that there will be no change in rates. Until August, experts thought the central bank would keep rates steady, but now the trend has reversed. According to Goldman Sachs, the rate hike cycle could start earlier than expected under the changed circumstances.

The Reserve Bank last hiked the repo rate by 0.25% to 6.50% in February 2023. This was followed by a reduction of 0.25% to 5.25% in December last year. Now there are strong indications of a rate hike once again.

Global market also puts pressure on RBI

Apart from domestic inflation, global markets are also putting pressure on the Reserve Bank. The US Federal Reserve raised interest rates last month and another hike is expected in October. Countries like the US and Japan are also raising rates to curb inflation.

Due to the rise in rates in the US, the difference between the two countries’ 10-year bond yields has narrowed to just 189 basis points, the lowest level in decades. India’s yield is 7.21% and America’s is 5.32%. Fewer differences make American markets attractive to foreign investors. According to Suyyash Chaudhary, CIO of Bandhan AMC, India will have to respect global rate trends due to strong dollar and expensive commodities.

Consumer spending may be affected during the festive season

Relievingly, GDP growth in the June quarter was 7.8%, 80 basis points higher than the Reserve Bank’s estimate. According to Yes Bank Chief Economist Indranil Pan, the economy is strong and can easily handle a slight increase in policy rates.

Madan Sabnavis, chief economist at Bank of Baroda, has a different view. He says the rate hike may affect consumer spending during the festive season. Furthermore, loan rates tend to rise rapidly but deposit rates do not change as rapidly. However, it also believes that the repo rate could touch 6% in this cycle due to rising inflation. Now all eyes are fixed on the decision of October 7.