RBI begins policy meeting as inflation pressures strengthen case for rate hike

• The RBI’s three-day policy meeting began on Monday, with a decision on the current 5.25 per cent repo rate due on Wednesday

• Bank of America and SBI Research see a stronger case for a 25-basis-point increase amid rising inflation, expensive crude and rupee weakness

• Retail inflation reached 4.82 per cent in August, while weather-related risks to crops could add to price pressures

The Reserve Bank of India’s (RBI) Monetary Policy Committee began its three-day meeting on Monday amid mounting expectations of an interest rate increase, as rising inflation, higher oil prices and a weakening rupee complicate the policy outlook.

The committee will announce its decision on Wednesday, 7 October. The benchmark repo rate currently stands at 5.25 per cent, with markets watching for what could be the first increase since February 2023.

Bank of America has brought forward its forecast for a 25-basis-point hike from December to October. It said higher energy costs, food inflation and price pressures spreading across the economy could prompt the RBI to begin withdrawing monetary support at this meeting.

SBI Research also sees the risks increasingly favouring a quarter-percentage-point increase. Its report cited broadening inflation, deteriorating global conditions, changes in liquidity and renewed repricing of risk in financial markets as reasons for acting early.

The report argued that a pre-emptive response would be prudent given geopolitical tensions and the threat of further increases in crude prices.

Retail inflation rose to 4.82 per cent in August from 4.45 per cent in July. Crude oil trading above $100 a barrel, rupee weakness and higher global bond yields have added to the pressures facing policymakers.

The outlook for food prices presents a further concern. Strong El Niño conditions and the prospect of below-normal rainfall in October could affect rabi crop output, potentially adding to inflation.

Together, these pressures have strengthened economists’ expectations of tighter policy, although the committee’s decision will become clear on Wednesday.

With IANS inputs