The jump in retail inflation in August to 7% has triggered apprehensions that India’s Reserve Bank (RBI) may unveil a sharper than expected interest rate increase to tame price pressures. This has dashed hopes that the central bank was shifting to a less-hawkish stance after a downward trend in prices.
Experts and financial markets are now bracing for an increase in the key policy rate by 35-50 basis points (100bps = 1 percentage point) when the RBI’s monetary policy panel meets to review interest rates in September end.
Recently, RBI governor Shaktikanta Das had said that macroeconomic conditions had improved after the August policy and that commodity prices were lower than what the central bank had estimated. The governor also said in an interview that the RBI will ensure that growth sacrifice would be minimum. This was at a time when economists and other forecasters were lowering growth projections for the current financial year.
The July industrial production growth numbers also showed that expansion was sluggish at 2.4%. The weakness was significant in manufacturing & non-durable consumer goods production along with contraction in mining. Das’s statements were seen as a softening of stance and yields of government bonds have eased in the money markets.
Repo is the interest rate at which the central bank lends money to banks. Deutsche Bank chief economist Kaushik Das forecasts that the US Federal Reserve will hike rates by 75bps, which will prompt the RBI to hike by 35bps. HSBC India in a report said that the RBI is expected to hike rates in the two remaining meetings of the year, taking the repo rate to 6% by December.