Prepare for another hike in interest rates and expensive loans

MUMBAI: The Reserve Bank of India (RBI) may raise its key interest rates for the third consecutive time by 25 to 35 basis points (0.25 to 0.30%) to control high retail price inflation , said experts.

The central bank’s rate-setting committee – the monetary policy committee – will meet on August 3 for three days to deliberate on the current economic situation and announce its bi-monthly review on Friday.

While retail price inflation was above 6% for six months, the RBI raised the short-term borrowing (repo) rate twice – by 40 basis points in May and 50 basis points in June.

The existing repo rate of 4.9% is still below the pre-Covid level of 5.15%. The central bank cut the benchmark rate sharply in 2020 to overcome the crisis created by the pandemic outbreak.

Experts are of the view that the Reserve Bank of India (RBI) would raise the benchmark rate to at least the pre-pandemic level this week and even more in the following months.

“We now expect the RBI MPC to raise the repo rate by 35 basis points on August 5 and reverse stance for a calibrated tightening,” the BofA Global Research report said.
The possibility of an aggressive 50 basis point hike and a measured 25 basis point hike also cannot be ruled out, he added.
The government has instructed the Reserve Bank to ensure that inflation based on the consumer price index remains at 4% with a margin of 2% on either side.

In a report, Radhika Rao, executive director and senior economist at DBS Group Research, said the RBI’s monetary policy committee is expected to remain focused on price stability over the next two quarters.

Taking into account the inflation peak in the July-September quarter, “we now expect a 35 basis point hike in August, followed by three 25 basis points for the terminal rate to stabilize at 6% by the end of fiscal year 23,” she said.

Retail inflation based on the Consumer Price Index (CPI), which RBI takes into account when setting its monetary policy, has been above 6% since January 2022. It was 7.01% in June.

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