Broadening Inflation, Strong Growth Raise Expectations of RBI Rate Hike in October

New Delhi, Sep 28 (KNN) Broadening inflation, strong economic growth and rising global interest rates are increasing expectations of a rate hike by the Reserve Bank of India (RBI) at its October policy meeting.

The RBI kept the benchmark repo rate unchanged at 5.25percent at its August review, citing the need for more evidence of broader inflationary pressures. Recent data shows that prices for nearly half of India’s inflation basket rose 4percent or more year-on-year, compared with around one-third in March, Reuters reported. 

Thirty-eight of 61 economists polled by Reuters expect the RBI to raise the repo rate by 25 basis points to 5.50percent at its October 5-7 meeting.

India’s economy grew nearly 8percent in the April-June quarter, while bank credit growth rose above 19percent in July, indicating stronger domestic demand.

Abhishek Upadhyay, Co-head of Research at ICICI Securities Primary Dealership, said the RBI “must opt for the prudent course” of a 25-basis-point hike, citing stronger growth, wider price pressures, elevated crude prices and global interest-rate conditions.

Global monetary conditions have also tightened, with several central banks raising borrowing costs. Krishna Bhimavarapu, APAC Economist at State Street Investment Management, said “the RBI may find it increasingly difficult to stay on the sidelines”.

He said a rate hike could support the rupee and strengthen the RBI’s inflation-control stance. Markets are already pricing in higher rates, with the one-year overnight index swap indicating around 90 basis points of hikes over the next 12 months.

(KNN Bureau)