RBI Likely To Raise Interest Rates By 35 Basis Points In December MPC Meet: Report

While in October, inflation slowed to 6.77 per cent, it is still above the upper end of the RBI’s 2-6 per cent tolerance band all year

The Reserve Bank of India (RBI) is likely to raise interest rates by 35 basis points to 6.25 per cent in December when its Monetary Policy Committee (MPC) meet next week, a Reuters report has said. A majority of economists expect another modest move up by the RBI to curb lingering inflation pressures, the report said. 

The news agency polled 52 economists between November 22 and November 30. Two-thirds of the participants said it was still too soon for the central bank to take its eye off inflation. While in October, inflation slowed to 6.77 per cent, it is still above the upper end of the RBI’s 2-6 per cent tolerance band all year. This year RBI has slowly increased the rates in a series of 50 basis point hikes.

The report said that Thirty-three (60 per cent), of the economists polled, said the RBI would raise its key repo rate by 35 basis points to 6.25 per cent at its December 5-7 policy meeting. Eleven said it would continue hiking by 50 basis points, while another eight respondents kept the estimated hike to 25 basis points.

“A 50 bps hike would be too aggressive given that inflation has started showing signs of moderation and is progressing in line with the RBI's projections. The terminal rate in this cycle is expected to be 6.50 per cent and the path to this is likely to be split between two rate hikes - 35 bps in December and then 25 bps in February," Sakshi Gupta, principal India economist at HDFC told Reuters. 

The report said that as rates are set to go a bit higher most economists see an upside risk to that. The RBI also has to consider the potential pressure on the rupee if it falls behind expected increases in US rates, it added. Coincidently, the US Federal Reserve is expected to shift to smaller rate rises at its policy meeting this month.

Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership said, "The risk that the Fed tightens even more than current pricing of close to 5 per cent is reasonably high and that could keep pressure on emerging market central banks such as the RBI to abstain from signalling the end of rate hikes.” 

The economists also expect that inflation would average 6.7 per cent for the fiscal year, and then fall to 5.2 per cent in fiscal 2023-24, the poll showed.

Most economists say that it is still too early for the RBI to shift its focus from inflation to growth, the report added. On Wednesday, India reported its Gross domestic product (GDP) growth for July-September was at 6.3 per cent, which was in line with RBI's forecast.