With the Federal Reserve raising interest rates by 75 basis points (bps) in September to bring the target range to 3-3.25 percent, Indian experts believe the Reserve Bank of India (RBI) will follow suit and raise rates for the fourth time in a row on September 30 to combat stubborn inflation.
Since May, the RBI has increased the short-term loan rate (repo) by 140 basis points (bps), and many expect it to rise another 50 bps to a three-year high of 5.9 percent. The central bank raised the repo rate by 40 basis points in May and by 50 basis points in June and August, bringing the current rate to 5.4%.
In August, consumer price index (CPI)-based retail inflation increased to 7%, following signs of a reduction since May. The RBI considers retail inflation while developing its bi-monthly monetary policy. The three-day meeting of the RBI Governor-led Monetary Policy Committee (MPC) will start on September 28. The rate-setting panel’s decision will be made public on September 30.
It should be noted that Federal Reserve of the United States Chairman Jerome Powell gave the third straight rate hike on September 21, raising rates by 75 basis points to bring the target range to 3–3.25. Following this, the Bank of England raised the main interest rate to 2.25 percent, the highest level since 2008. To combat inflation, the EU has also raised interest rates.
According to Bank of Baroda Chief Economist Madan Sabnavis, inflation in India remains over 7% and is unlikely to fall anytime soon. “This suggests that interest rates will be raised. The market would be interested in the quantum. “He stated. A rise of 25-35 basis points would have communicated that the RBI is convinced that the worst of inflation has passed, but recent developments in the FX market may necessitate a greater quantum of 50 basis points in order to maintain investor interest.”
Meanwhile, the Union government has asked the RBI to keep retail inflation under control and ensure that it does not exceed 4%, with a 2% margin on each side. Dhruv Agarwala, CEO of Housing.com Group, stated that the RBI’s key priority would be to keep inflation under control despite the durable economic expansion and substantial loan growth. Global commodity prices have remained volatile since falling from historical highs in June.
Despite the fact that SBI recently signaled a 50 basis point increase in the repo rate by the RBI and labeled it “imminent,” the cycle’s highest repo rate is expected to be 6.25 percent. In December policy, a final rate hike of 35 basis points is expected. It states Aditi Nayar, Chief Economist at ICRA predicts another “new normal” 50 basis point rate hike from the MPC in September 2022. With inflation forecast to fall in October 2022, she believes the December policy decision will be heavily influenced by data.
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