The Reserve Bank of India (RBI) may raise the benchmark lending rate by 25-50 basis points on Wednesday as inflation continues above its comfort level, experts say. Last month, the RBI raised the repo rate or short-term lending rate by 40 basis points in an off-cycle monetary policy review. The decision of the Monetary Policy Committee (MPC), headed by RBI Governor Shaktikant Das, which began its discussions on Monday, is expected to be announced at 10 am on Wednesday. Das has already hinted that there could be another increase in the repo rate although he was reluctant to set the amount.
Consumer Price Index (CPI) -based inflation, which is the reason when it comes to RBI’s monetary policy, has been rising since October 2021. Retail inflation has been above the RBI’s upper tolerance since January. In April, it rose to an 8-year high of 7.79 percent. The government has tasked the central bank with ensuring that retail inflation remains at 4 per cent with a margin of 2 per cent on both sides.
A report by HDFC Bank’s Treasury Research Desk states that the RBI is expected to raise the policy rate by 25 bps while keeping its position and CRR unchanged. “We tend to increase the rate by 25 bps instead of 50 bps because we do not see a compelling case for a large rate increase at this stage,” it says. It expects the RBI to change its inflation forecast to 70-80 bps from 5.7 percent previously due to changes in global and domestic price pressures. Yes Bank chief economist Indranil Pan said the surprise of inflation has highlighted the need to tighten the RBI’s monetary policy.
“We see that the RBI has extended the repo rate by 40 bps in May to 35 bps in June, then increased to 25 bps each in August and September. It also gives some consolation to the cycle, “said Sarnash Trehan, managing director of the Trehan Group.
Banks will eventually pass it on to borrowers. However, due to the existing historical low-interest rates, it will not have a significant impact on demand, he said.
“We expect the policy rate to increase by 35-50 bps. The RBI, however, has the potential to provide continued liquidity support through the LAF window to sustain the growth process. “We expect the CRR to increase to reduce liquidity as the rate rises to 35-50 bps,” said Anand Nevatia, fund manager at Trust Mutual Fund, a credit rating agency, informatics.
The government has tasked the RBI to ensure that CPI-based inflation stays at 4 per cent, with a gap of two per cent on both sides. Last month, the MPC raised the key policy rate (repo) by 40 basis points to 4.4 percent to control rising inflation. This was the first rate increase since August 2018. In a bid to reduce the impact of the lockdown, the RBI cut the repo rate by 75 basis points to 4.40 percent on March 27, 2020 from 5.15 percent. On May 22, 2020, the RBI again cut the repo rate by 40 basis points to 4 percent. Thereafter, it maintained the benchmark interest rate for about two years before increasing to May 4, 2022.
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