Reserve Bank Heads For Its Third 50 Bps Rate Hike As Rupee Plunges To Record Lows

The RBI’s six-member monetary policy committee (MPC) will raise its repurchase rate by 50 basis points to 5.90 per cent, according to 24 of 35 economists surveyed by Bloomberg as of Wednesday

The Reserve Bank of India (RBI) is likely to hike rates by half a point for the third time in a row as the rupee’s plunge to a record low this month complicates the battle against inflation, news agency Bloomberg said.

According to a report, the RBI’s six-member monetary policy committee (MPC) will raise its repurchase rate by 50 basis points to 5.90 per cent, according to 24 of 35 economists surveyed by Bloomberg as of Wednesday. Ten economists forecast the rate will rise by 35 basis points to 5.75 per cent, while one sees a quarter-point increase.

Governor Shaktikanta Das may opt for a hawkish stance on Friday as during the August MPC meet he pledged to do "whatever it takes" to cool inflation that has stayed above 6 per cent this year. Since then, India's price gains quickened anew and the currency slump deepened as the US Fed raised rates by 75 basis points for a third consecutive time and amplified a hawkish signal, while warning of a painful slowdown needed to curb US inflation.

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

"The biggest point of worry currently is the significant depreciation in the currency,” said Upasna Bhardwaj, chief economist of Kotak Mahindra Bank Ltd. Deteriorating reserves curtail RBI's ability to intervene so “higher interest rates will have to be maintained with hawkish tone in the policy to support the rupee."

With oil prices falling below $80 a barrel from more than $120 in June, the RBI will probably revise its oil price assumption on Friday from the $105 level it factored in previously. However, it's unlikely to make any significant changes to this year's 7.2 per cent economic growth forecast, or 6.7 per cent inflation outlook, given pressures from food grain prices.

HSBC Holdings Plc economists, led by Pranjul Bhandari, wrote in a note this week, "The inflation-growth mix is likely to remain tricky."  They expect the RBI to hike by 50 basis points each at the September and December meetings and see average inflation staying above the 4 per cent mid-point of the RBI's target range in the current and next fiscal years as economic growth slows.

The rupee is down about 10 per cent this year and trading near a record low even after the RBI mounted a staunch currency defense in the past year, evident from an almost $100 billion drop in its foreign-currency reserves, with some of the decline attributed to revaluation.

Das had said the reserves “provide a cushion against external shocks.”

A broad consensus among market participants was that anything lower than a 50 basis-point hike, or the governor sounding less hawkish may push the currency even lower.

“Rupee readjustment is catching up faster than peers, as it was held artificially stronger in past adjustments by policy intervention,” Madhavi Arora, lead economist at Emkay Global Financial Services wrote in a note, “The FX war chest has already dipped an estimated more than $100 billion, while the war is still pretty much on.”

Bond traders are also watching for signs from the central bank on how it plans to manage liquidity in the financial system that's been tightening.

While the RBI's intervention in the foreign-currency market is reducing the supply of rupees, increased domestic activity after a broad reopening from virus restrictions has contributed to the strain.