RBI's Monetary Policy Committee Starts Three-Day Meet Today, Another Rate Hike On The Cards

The MPC, headed by RBI Governor Shaktikanta Das, is scheduled to meet during September 28-30 and the decision will be announced on Friday

The RBI had hiked 50 basis points in repo rate each in June and August after raising the short-term lending rate by 40 basis points in an off-cycle decision in May.

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The Reserve Bank of India's(RBI's) Monetary Policy Committee (MPC) started its three-day deliberations on Wednesday amid expectations of yet another rate hike of 50 basis points to tame inflation, in line with similar actions taken by other major central banks, including the US Fed. The MPC, headed by RBI Governor Shaktikanta Das, is scheduled to meet during September 28-30 and the decision will be announced on Friday.

The RBI, based on the recommendations of the MPC, had hiked 50 basis points in repo rate each in June and August after raising the short-term lending rate by 40 basis points in an off-cycle decision in May.

The central bank, which has since May raised the repo rate by 140 basis points (bps), likely to go for another 50-bps increase, which will take the key rate to a three-year high of 5.9 per cent.  Currently, the rate stands at 5.4 per cent.

The consumer price index (CPI) based on retail inflation, which had started showing signs of moderation in May, has again firmed up to 7 per cent in August. The RBI takes into account retail inflation while framing its bi-monthly monetary policy.

The US Fed delivered the third consecutive rate hike after it raised the rates by 75 bps to take the target range to 3-3.25 per cent. The central banks of the UK and the EU have also gone for rate hikes to contain surging inflation.

According to a report by the PTI, Bank of Baroda said the monetary policy this time will be more closely watched, given the recent developments in the forex market following the Fed raising rates last week. The RBI’s view on all issues will provide guidance to the market on repo rate, stance, growth and inflation projections, rupee, liquidity, and global view.

"In the upcoming credit policy of the RBI, which is scheduled on 30 September, we expect MPC to raise the repo rate by another 50 bps. We expect rates to increase up till 6-6.25 per cent," the report said.

The government has tasked the RBI to ensure the retail inflation remains at 4 per cent, with a margin of 2 per cent on either side.

Since May, the banking regulator has cumulatively raised the interest rate by 140 bps in its effort to tame inflation. Despite this sharp hike, the RBI expects inflation to remain above its comfort zone and has retained the CPI inflation forecast at 6.7 per cent for the current fiscal year.

V Swaminathan, executive chairman, Andromeda Loans, opined that given the increase in rates in other economies, the RBI has no choice but to increase rates. "However, inflation in India is not as much of a problem and the quantum of increase should be moderated in this light. Home loan borrowers would be well advised to explore fixed-rate loans in this kind of environment," he said.

Property consultant Anarock Group Chairman Anuj Puri said that with the inflationary pressures evident across the world, many countries have seen back-to-back interest rate hikes in the recent past.

India is closely knit to the global economy and had to take remedial actions to control inflation, which is driven by domestic as well as global factors. "A degree of discomfort notwithstanding, a 50-bps hike should not seriously hamper homebuyers' sentiments. Moreover, the festive season is around the corner. This is a period when developers usually roll out various freebies and offers, and we may even see fixed interest rate guarantee plans announced this year," Puri said.

Meanwhile, the rupee on Wednesday continued to plunge to hit a fresh record low of 81.9 against the US dollar in early trade amid a spike in US bond yields. On Monday, the currency tanked 58 paise to close at an all-time low of 81.67. However, it recovered a bit on Tuesday with the rupee gaining 37 paise to touch 81.30 against the dollar.