RBI MPC decision today: Will RBI hike repo rate by 25 bps to 5.50%?

The Reserve Bank of India’s Monetary Policy Committee (MPC) is set to announce its interest-rate decision today, with expectations firmly tilted towards a 25 basis points (bps) hike in the repo rate as the central bank weighs rising inflation, elevated crude oil prices and pressure on the rupee against the need to support economic growth.A 25 bps increase would take the repo rate from 5.25% to 5.50% and would mark the RBI’s first rate hike since February 2023. A Reuters poll showed nearly 60% of economists, or 35 out of 61, expect the RBI to raise rates by 25 bps in Wednesday’s decision. Markets have also largely priced in such a move.However, the decision is not a straightforward one. The RBI has to assess whether recent inflationary pressures are persistent enough to warrant higher borrowing costs, while ensuring that monetary tightening does not hurt domestic demand and credit growth.CA Kinjal Shah, President, Bombay Chartered Accountants Society (BCAS), said a 25 bps hike to 5.50% is widely anticipated amid rising retail inflation, elevated energy costs and global tightening. “Beyond the rate decision, clear stance guidance on liquidity and future rate paths is vital to anchor inflation expectations, maintain credit flow while preserving domestic growth,” Shah said.WHY A RATE HIKE IS ON THE TABLEInflation has emerged as one of the key reasons for the RBI to consider tightening policy. Consumer inflation rose to 4.82% in August, remaining above the RBI’s 4% target for the third consecutive month, according to Reuters. At the same time, crude oil prices have risen sharply, increasing the risk of imported inflation. The rupee has also remained under pressure, while global bond yields have risen and several central banks have moved towards tighter monetary policy.A rate hike could help support the rupee by making rupee-denominated assets relatively more attractive and also signal that the RBI is prepared to respond if inflationary pressures become more persistent.JM Financial, in its October MPC preview, said the central bank faces a choice between “frontloading” a rate hike now or waiting until December. It expects a shallow rate-hike cycle beginning in October, arguing that elevated crude prices, narrowing India-US yield differentials and pressure on the rupee increase the cost of maintaining a status quo.The brokerage also pointed to excess liquidity in the banking system. Despite the RBI draining Rs 6.4 lakh crore through various measures, excess liquidity was still estimated at around Rs 4.8 lakh crore. JM Financial said this could cushion some of the impact of a rate hike on economic growth.CRUDE, RUPEE AND GLOBAL RATESElevated crude oil prices are another concern for the RBI because India imports a large share of its oil requirements. Higher oil prices can increase the country's import bill, put pressure on the rupee and feed into inflation.JM Financial noted that Brent crude prices had risen 14% in September, while the India-US policy-rate differential had narrowed sharply. It also highlighted pressure on the rupee and foreign exchange reserves as factors that could make waiting to raise rates more costly.Atul Monga, CEO and Co-Founder, BASIC Home Loan, said the RBI would need to balance emerging inflationary pressures with the need to sustain economic growth and credit demand.“Elevated crude oil prices, a broader pickup in inflation and changing global rate dynamics have increased the case for a calibrated policy response,” Monga said.For the housing market, however, Monga does not expect a moderate rate increase to materially alter demand for home ownership. He said housing remains a long-term financial decision, particularly for first-time buyers in Tier II and Tier III cities.Saurabh Jain, Co-Founder and CEO, Stable Money, also expects a 25 bps increase, taking the repo rate to 5.50%.“With inflation moving higher in recent months and pressures becoming more broad-based, the October MPC meeting will be closely watched,” Jain said.He added that investors could see relatively attractive rates in fixed-income products such as fixed deposits and bonds if the rate cycle turns tighter, but said investment decisions should not be based only on expectations of the next rate move.NOT EVERYONE EXPECTS A HIKEVarun Garg, Director, Karyan Group, expects the RBI to maintain the repo rate, arguing that stable interest rates would provide greater certainty for homebuyers and support residential demand.“We expect the RBI to maintain the repo rate in its upcoming policy announcement, providing much-needed stability to the housing market,” Garg said.He added that stable lending rates would particularly help first-time buyers and end-users who are closely watching borrowing costs.The rate decision itself may not be the only focus for markets. The RBI’s commentary on inflation, liquidity and the future path of interest rates could be equally important.Reuters reported that while a 25 bps hike is fully priced into markets, there is also a modest possibility of a larger 50 bps increase. The 1-month overnight indexed swap was trading around 5.55% on Tuesday, although market participants cautioned that abundant banking-system liquidity has made the indicator less reliable.JM Financial expects the RBI to begin a shallow rate-hike cycle, with the possibility of the first hike being frontloaded in October. It also said deficient rainfall and depleted reservoir levels could push up food prices, although such supply-side inflation would be less responsive to monetary policy.For borrowers, therefore, today's decision could be only the beginning of the rate debate. A 25 bps hike would matter, but the RBI’s guidance on whether this is a one-off move or the start of a longer tightening cycle will be closely watched.- Ends