The Reserve Bank of India (RBI) will release its monetary policy statement today. With rising fuel prices and falling rupee value, the central bank is, according to experts, likely to increase the repo rate by 25 basis points to combat the inflationary pressures. The committee headed by RBI Governor Urjit Patel had its fourth bi-monthly review over the last two days.
The anticipation of a rate hike has increased in the past month as oil prices climbed, the rupee’s slide accelerated and concerns on liquidity emerged. The rupee on Friday inched closer to 75 per dollar to be one of the worst performing currencies in Asia. If the RBI increases the repo rate by a quarter percentage, then it would be the third consecutive rate hike. Currently, the repo rate stands at 6.50 per cent.
Repo rate hike
A 25 basis point repo rate hike to 6.75 per cent would mean a 75 basis point rise since June, the steepest increase since the last tightening cycle, between September 2013 and January 2014, when India faced its worst currency crisis since the 1990s. At a time when the US interest rates are running high, a repo rate hike would help in attracting more foreign investors.
“With petrol and diesel prices moving up, there is a strong expectation that inflation will also move up. So, they (RBI) may take a pre-emptive action. I feel there will be an increase of 25 basis points in the repo rate,” Union Bank of India managing director and chief executive Rajkiran Rai G told PTI.
The SBI, in its research report, Ecowrap, said the RBI should raise the policy repo rate at least 25 basis points to arrest the rupee’s fall. “We rule out a hike of 50 basis points, as it may spook the market. However, there is a probability of change in neutral stance too, as three successive rate hikes with a neutral stance could contradict RBI message,” the research report said.
Morgan Stanley in a report said it expects the RBI to hike the short-term rates at its October meeting. It said it remains bearish on the rupee despite the recent emerging market (EM) stabilisation as there are concerns about the recent default of a local financial institution, oil prices and a widening fiscal deficit persist.
According to a poll conducted by news agency Reuters between the period of September 19 to 25, 35 of 64 respondents expect a rate hike on Friday. In a July poll, only 11 of 56 projected the rate to be 6.75 per cent by December.
Markets on edge over IL&FS crisis
The RBI is also expected to assure markets that adequate funds are available after investors panicked when a series of debt defaults by Infrastructure Leasing & Financial Services (IL&FS) led to redemption pressure at other companies in the shadow banking sector. Analysts suggest that the bank is likely going to come up with certain regulations to govern the non-banking financial companies (NBFCs).
Inflation and cash reserve ratio
The retail inflation in the country cooled to an 11-month low of 3.69% in August. It is, however, expected to go above the RBI’s projected 5 per cent by June 2019 on higher fuel prices, the weak rupee and strong consumer spending.
Bankers, however, do not expect the RBI to reduce cash reserve ratio (CRR), in the upcoming policy, despite liquidity condition remaining tight. “The RBI has taken a few measures to ease the liquidity condition. I don’t think they will reduce CRR,” said a senior treasury official of a state-run bank.
“The RBI is ready to keep real rates high because the policy mandate is to anchor inflation,” said Anindya Banerjee, deputy vice president, currency derivatives at Kotak Securities, reported Reuters. “The biggest policy anchor for rupee is high real rates. Raising the repo rate will increase the real interest rates and help in attracting fresh foreign inflows which will help in containing the rupee.”
(With inputs from agencies)