The Reserve Bank of India (RBI) began its three-day Monetary Policy Committee (MPC) meeting on Monday, with the policy decision scheduled for Wednesday, amid rising inflation, crude oil prices above $100 a barrel and pressure on the rupee.
The MPC is meeting from October 5 to October 7 to decide on the benchmark repo rate. Markets are closely watching whether the central bank will raise the rate for the first time since February 2023. The repo rate currently stands at 5.25%.
Economists expect the RBI to consider beginning a rate-hike cycle earlier than previously anticipated as energy costs and broader inflationary pressures increase.
Analysts expect 25 bps rate hike
According to media reports, Bank of America (BofA) is expecting the RBI to raise the repo rate by 25 basis points (bps) in October instead of December, as it had forecast earlier.
BofA said higher energy costs, food inflation and broader price pressures have strengthened the case for tighter monetary policy after nearly two years of accommodation.
An SBI report also highlighted the risks posed by geopolitical tensions, higher crude prices and the repricing of risks in global markets. It said taking pre-emptive action could be preferable to falling behind the inflation curve.
Inflation, crude prices put RBI in focus
Inflation has become increasingly broad-based. Consumer Price Index (CPI) inflation increased to 4.82% in August from 4.45% in July.
Strong El Nino conditions and the possibility of below-normal rainfall in October could pose further risks to rabi crop output, adding to concerns over food prices.
At the same time, crude oil prices above $100 a barrel could increase imported inflation pressures for India. Higher global bond yields and weakness in the rupee have further complicated the policy environment.
Together, rising crude oil prices, persistent inflationary pressures and higher global yields have narrowed the RBI's room to keep interest rates unchanged.
The MPC's decision on Wednesday will therefore be closely watched for indications of whether the central bank is ready to shift towards tighter monetary policy.
