The Reserve Bank of India (RBI) Monetary Policy Committee (MPC) is scheduled to meet from October 5 to 7 to review the country’s monetary policy and take a decision on the benchmark repo rate. Ahead of the meeting, economists believe the central bank could begin raising interest rates earlier than previously expected.
Earlier, expectations were that the rate hike cycle could begin in December. However, growing inflationary pressure, higher energy prices and changing global economic conditions have increased the possibility of a rate hike in the October MPC meeting.
Economists Expect 25 Basis Points Rate Hike
According to Bank of America (BofA), rising energy costs, food inflation and broader price pressures could prompt the RBI to increase the policy rate by 25 basis points in October. Previously, the brokerage had expected such a move in December.
BofA believes that after a prolonged period of monetary easing, the RBI may now start taking steps to gradually withdraw policy support. The brokerage expects a 25-basis-point increase during the October MPC meeting.
SBI Research Also Sees Higher Rate Hike Risk
SBI Research has also highlighted an increased possibility of a 25-basis-point rate hike. According to its assessment, expanding inflationary pressures, worsening global conditions, liquidity developments and a reassessment of global risks could strengthen the case for early action by the central bank.
Geopolitical tensions and the risk of higher crude oil prices are also emerging as important factors. SBI Research believes that taking timely action could be preferable to waiting until inflationary and global risks become more difficult to manage.
Inflation and Crude Oil Prices Remain Key Concerns
Inflation has emerged as one of the major factors that could influence the RBI’s decision. CPI inflation increased to 4.82% in August from 4.45% in July.
Weather-related risks could also affect food prices and the upcoming rabi crop. At the same time, higher crude oil prices and rising global bond yields may reduce the room available for the RBI to keep interest rates unchanged for an extended period.
BNP Paribas Flags Weakening Macro Outlook
A report from BNP Paribas India pointed to a weaker macroeconomic outlook for the country in recent weeks. The report highlighted the rise in Brent crude prices above $100 per barrel and the movement of the US 10-year Treasury yield toward 5% as key global developments that could put additional pressure on the Indian economy.
Nomura Expects Limited Rate Hikes
Analysts at global brokerage Nomura expect the RBI to keep the current interest-rate tightening cycle relatively limited. According to their assessment, the central bank could raise rates by around 25-50 basis points during the current cycle.
Nomura’s view suggests that the RBI may opt for measured tightening instead of a much larger increase of more than 75 basis points. The brokerage has estimated an 80% probability of limited rate hikes rather than a broader and more aggressive tightening cycle.
What Is a Basis Point?
A basis point (BPS) is a standard unit used in finance and banking to measure small changes in interest rates or bond yields. One basis point equals 0.01 percentage point, while 100 basis points are equal to 1 percentage point.
The October MPC meeting will therefore be closely watched by borrowers, banks, investors and the broader financial markets, as the RBI’s decision could influence borrowing costs, liquidity and market sentiment.
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