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Why RBI would be pushed to hike interest rates

  • RBI may raise the repo rate by 50 basis points during its meeting this week
  • Inflation has been over the RBI's upper tolerance level of 6% for the past six months
  • However, inflation has slowed since the RBI began raising the policy rates in May

Written by:Devanshu
Published: August 02, 2022 09:43:25 New Delhi, Delhi, India

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) will announce its interest rate decision this week. The RBI governor, Shaktikanta Das, is expected to announce policy decisions on Friday, September 30. The RBI’s focus on the withdrawal of its accommodative policy in response to rising inflation is expected to lead to a further rise in interest rates in the banking system.

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The RBI may raise the repo rate by 50 basis points, according to analysts. The objective of this is to curb inflation, which has been over the RBI’s upper tolerance level of 6% for the past few months.

Also Read | How the US Federal Reserve’s rate hike impacts RBI policy

Additionally, for the past three months, inflation has been near 7%. The consumer price index (CPI)-based inflation rate was 7% in August.

However, inflation has slowed since the RBI began raising the policy rates in May. In an unexpected move, the RBI raised the benchmark interest rate by 40 basis points on May 4.

CPI inflation for April was 7.79% prior to the policy announcement. In May, inflation fell marginally to 7.04%.

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The RBI increased the repo rate by 50 basis points on June 8. The cash reserve ratio (CRR) was also increased to 4.5% from 4% previously. Consequently, a number of banks raised their interest rates on saving accounts and fixed deposits (FDs). In June, inflation fell further to 7.01%. In July the retail inflation was 6.71%.

However, as the Ukraine war entered its eighth month, oil and other commodity prices eased slightly but remained above the pre-war level. Brent crude oil was priced at $81.83 on September 29 compared to $102.9 per barrel on August 1.

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The Federal Reserve of the United States has maintained its hawkish stance. Fed Chair Jerome Powell raised interest rates by 75 basis points to 3%-3.25% in his policy announcement on September 21. The RBI is also anticipated to adopt a similar approach, but the increase may not be as big.

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