As the RBI prepares to announce its monetary policy decision, economists are split on whether the MPC will hike the repo rate now or wait until December, though most anticipate a tightening cycle due to rising inflation and global uncertainty.
The Reserve Bank of India is set to announce its monetary policy decision on Wednesday, with economists divided over whether the Monetary Policy Committee will raise the repo rate immediately or wait until December, even as most expectations point to a tightening cycle of up to 75 basis points amid rising inflation risks and global uncertainty.
The MPC's three-day meeting, being held from October 5 to 7, comes after it kept the repo rate unchanged at 5.25 per cent in August and retained a neutral stance, citing the need for greater clarity on the inflation outlook and evolving growth-inflation dynamics.
Economists Divided on Rate Hike Timing
Ahead of Wednesday's decision, Crisil Chief Economist Dharmakirti Joshi has backed an immediate rate increase, while Bank of Baroda Chief Economist Madan Sabnavis expects the RBI to pause for one more policy before beginning a tightening cycle from December. “With strong domestic growth and global interest rates moving up, a mix of all these factors tells me that the monetary policy cycle will turn, and we should see a rate hike in the coming policy meeting,” Joshi had told ANI, expecting a 25-basis-point increase. Deloitte Chief Economist Rumki Majumdar has also flagged the possibility of a rate hike later this year, but said the timing remains uncertain as the RBI weighs strong credit growth against higher global yields and inflation pressures. “The question is when. May not be in October. It might be, if not in October, but maybe later in the year in December,” Majumdar told ANI.
Sabnavis, however, expects the central bank to wait for greater clarity on inflation and the kharif harvest before acting. “The RBI may take a pause for one more policy and then bring about a rate hike from December onwards,” he said. He expects three 25-basis-point increases in December, February and the beginning of the next financial year, taking the repo rate to around 6 per cent.
Inflation and Global Pressures Add to Complexity
The expected tightening comes against a backdrop of rising inflation risks, with CPI inflation seen moving above 5 per cent during FY27. Deficient monsoon conditions and crude prices around USD 100 a barrel are expected to add to price pressures.
Additionally, the RBI's special forex swap facility has mobilised USD 132.98 billion through FCNR(B) deposits as of August 31. The strong inflows have also raised concerns over surplus liquidity and the need for further absorption.
Global financial conditions remain challenging, with the US Federal Reserve raising its policy rate by 25 basis points at its latest meeting and US bond yields remaining elevated at over 5.3 per cent, while the rupee was trading at 96.4200 per US dollar at the time of filing this report, adding to the external pressures facing the central bank.
Against this backdrop, the RBI is expected to balance rising inflation and liquidity concerns with resilient domestic growth while deciding the pace of monetary tightening. (ANI)
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