Highlights:
• Increase its policy interest rate to keep inflation under control
• The RBI may step up its efforts by increasing the cash reserve ratio (CRR)
The Reserve Bank of India will raise its policy interest rate this week as part of a global central bank chorus to keep inflation under control. However, the magnitude of the increase is unpredictable because it considers changing factors such as crude oil, government tax action, and the impact of the monsoon on food grain output when forecasting future prices.
Overview
According to the survey, the policy repo rate could be raised by 25-50 basis points, raising the rate at which the RBI lends to banks from 4.4 percent to 4.9 percent. Almost half of the 23 market participants polled, including traders, economists, fund managers, and heads of financial institutions, predict a 50-basis-point increase, with the remainder expecting it to range between 25 and 40 basis points.
Following its unexpected rate and liquidity moves in May, the RBI may step up its efforts by increasing the cash reserve ratio (CRR), or the proportion of deposits banks keep with the central bank, in order to keep the consumer price index from exceeding its upper tolerance limit of 6%.
Monetary Policy Committee’s Decision
While the rate hike is a foregone conclusion, investors will be watching the inflation forecast and the expected terminal rate in this upcycle closely as the RBI pursues an economic recovery through increased investment.
The Monetary Policy Committee (MPC) may raise inflation forecasts while decreasing growth forecasts, but the magnitude of these changes will be determined by the MPC’s assessment of the government’s unseen hand in manipulating tax rates to keep prices under control.
Aggressive rate hikes are unlikely to occur. Furthermore, the prospect of a good monsoon will begin to influence consumer pricing. “The MPC is expected to issue a decision on Wednesday.
