Hike rates

RBI set to raise rates to pre-pandemic levels, focus shifts to political track

RBI to hike rates, focus on central bank growth and inflation outlook

The Reserve Bank of India is expected to raise interest rates today for the third time since the start of the current fiscal year to bring inflation down to above the central bank’s upper target threshold since January. The focus is on the RBI’s growth and inflation outlook and the tone of the monetary policy path.

Here’s your 10-point guide to history:

  1. The Monetary Policy Committee (MPC) meeting started on Wednesday and RBI Governor Shaktikanta Das is expected to announce the decisions of the Monetary Policy Committee at 10am.

  2. The RBI had said it was scrapping policies introduced as part of the COVID support, and if the central bank raises at least 25 basis points, interest rates will rise to pre-pandemic levels.

  3. While the rise in key interest rates is almost certain, analysts and economists have different opinions on the magnitude of the rate hike. It varies between 25 basis points and 50 basis points.

  4. According to HDFC Bank Chief Economist Abheek Barua, the RBI is “likely to take rates above a level deemed ‘neutral’ – which we believe is closer to 5.25% – before slowing down or consider becoming more data dependent in this rate hike cycle.”

  5. With the current retail inflation rate above 7%, falling prices for many commodities are seen as a major influencing factor towards a lower inflation path.

  6. If the RBI raises the key rate on Friday, which is almost certain, it will be the third hike in a row. The central bank began tightening its monetary policy at the start of the current fiscal year. In its off-cycle monetary policy review in May, the RBI raised the repo rate by 40 basis points or 0.40%.

  7. This was the first increase in the repo rate in nearly two years. The repo rate is the interest rate at which the RBI lends short-term funds to banks. In its bi-monthly policy review in June, the RBI raised the repo rate by 50 basis points to 4.90%.

  8. India’s central bank is not only worried about inflation. In July, the value of the rupee against the dollar fell to an all-time low of just over 80, forcing the RBI to use foreign exchange reserves to stop further damage. India’s trade deficit has also increased significantly.

  9. A separate Reuters report showed that the Indian rupee could hit record highs if the RBI decides on a smaller hike.

  10. But on the impact of the RBI’s decision on stock markets, Srikanth Subramanian, CEO Designate of Kotak Cherry said, “Stock markets appear to have priced in a 35 to 50 basis point rise and as a result , a corresponding rate hike may not come as a big shock, especially given the good results and economic momentum.”