Reserve Bank of India to raise interest rates

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Indian Prime Minister Narendra Modi

The Reserve Bank of India (RBI) is likely to raise interest rates on Wednesday while retaining a neutral policy stance as it aims to strike a balance between rising inflationary pressures and still recovering growth.

Thirty-seven of 63 economists in a Reuters poll last week said the RBI will raise rates on Wednesday, while 22 said the next hike would come later this year, or early in 2019.

Last June, the benchmark lending rate, was raised for the first time in over four years, by 25 basis points to 6.25 percent.

“Since the RBI is committed to bringing down inflation, they don’t have a choice but to raise rates,” said Rupa Rege Nitsure, group chief economist at L&T Finance Holdings.

“The RBI did not change its policy stance in June due to the various uncertainties they faced and the degree of uncertainty has gone up considerably compared to the last policy, so they would continue to retain the neutral stance,” she added.

India’s annual consumer inflation hit 5 percent in June, the eighth straight month it topped the RBI’s medium-term 4 percent target.

Global crude oil prices have surged nearly 20 percent this year and crossed $80 a barrel in May, their highest since 2014.

This has driven the prices of fuel, the biggest item on India’s import bill to record highs at a time the rupee is testing new life lows, raising the threat of imported inflation.

Indian traders said though the market was largely prepared for a rate hike on Wednesday, yields would still shoot up by 5-10 basis points after one, and the surge would be much more if the RBI also tightens its stance.

Wednesday’s decision is “likely to be a close call, with odds of a hike marginally higher than a pause. While the tentative calm in the financial markets provides the RBI with the time and space to keep rates on hold, a pre-emptive move is preferable,” said DBS economist Radhika Rao.

Peace PIAK