NEW DELHI: The Reserve Bank's rate-setting panel on Wednesday started deliberations on the keenly awaited monetary policy amidst expectation of 50 basis points hike in interest rate to check inflation and improve foreign capital inflow to arrest declining value of rupee against the US dollar.
The decision of RBI Governor Shaktikanta Das headed six-member Monetary Policy Committee (MPC) will be announced on September 30.
The government has tasked the central bank to ensure the consumer price index (CPI) remains at 4 per cent with a margin of 2 per cent on either side, but retail inflation has stubbornly stayed above the RBI's comfort zone since January.
As per the latest data, the inflation was at 7 per cent in August.
While inflation remains high, the Indian rupee is sliding sharply, the US dollar and was currently trading near 82 against the greenback. The rupee depreciation has hastened following the US Fed raising their interest rate thrice by 75 basis point each in the recent past. Other major central banks too have become aggressive in raising rates.
The RBI, which has since May raised the repo rate by 140 basis points (bps), may yet again go for a 50-bps increase, which will take the key rate to a three-year high of 5.9 per cent, say experts. The present rate is 5.4 per cent.
Industry body Assocham said hike in policy interest rates by the RBI in the range of 35-50 basis points seems unavoidable, given the tightening of rates by most of the central banks including the US Federal Reserve.
"While the industry would like to see lower interest rates, the main challenge and the priority is to tackle inflation head-on so that we have a sustainable growth," said chamber's Secretary General Deepak Sood.
He said the accommodative stance by the RBI supported by several fiscal measures by the government had certainly helped the economy in a multi-pronged manner.
Ramesh Nair, CEO, India and Managing Director, Market Development, Asia, Colliers expects the repo rates to see a further rise, as the government is trying to curb inflation levels.
"The current repo rates stand at 5.4 per cent with the rate hovering above pre-pandemic levels. Banks have begun raising loan interest levels as a result of higher repo rate," he said.
However, the upcoming festive season will spur sales as the developers are expected to offer attractive deals to homebuyers and this could neutralise the impact of rising home loan rates to some extent, he added.
Besides inflation, the RBI is also likely to come out with steps to shore up foreign capital inflows to check the declining value of the rupee against the US dollar. Forex reserves have declined by USD 86 billion to USD 546 billion (from their highs last year).
A SBI research report said the Indian markets have, however, performed much better. Specifically, the rupee has been holding remarkably well with RBI intervention supporting it in the market.
"This is in sharp contrast to the 2013 taper tantrum crisis when the rupee witnessed significant volatility for a prolonged stretch of time. We believe that it might be better for RBI to allow the rupee to depreciate a bit, finding its natural balance," it said.
Even as the Dollar Index has surged by 17.1 per cent, since the Russia-Ukraine war broke out, the rupee has only depreciated by 7.8 per cent, indicating the RBI has been leaning against the wind in terms of managing the currency and it may pay off now with a little bit of leaning with the wind, though only to an extent, the report said.
After investing over Rs 51,200 crore in August, the pace of foreign investors buying Indian equities slowed in September as they invested only Rs 1,386 crore so far. However, in the last four trading sessions, FPIs have pulled out a little over Rs 9,750 crore from the Indian equity market amid strengthening of the US dollar.