The Reserve Bank of India is poised to raise interest rates for the first time in nearly four years on Wednesday as rising inflation and a rupee near record lows force policymakers to shift gears.
The committee is expected to retain a neutral policy stance, keeping its options open for further moves. Foreign exchange reserves posted a record weekly decline as the RBI intervened to prop up the currency. A resilient economy gives policymakers scope to lift borrowing costs without significantly denting growth. Not everyone is convinced the RBI needs to raise rates yet. Oxford Economics’ Alexandra Hermann Prasad argues core inflation, which strips out volatile food and fuel components, remains benign and gives the central bank room to support growth for longer.
Of the 41 economists surveyed by Bloomberg, 35 expect the six-member Monetary Policy Committee to raise the benchmark repurchase rate by a quarter point to 5.50 per cent, with the remainder predicting no change. Since the RBI’s last policy meeting in August, inflation has accelerated further, oil prices have surged back above $100 a barrel, the US Federal Reserve has begun tightening, and the rupee has weakened. With inflation nearing 5 per cent and expected to climb closer to the upper end of the RBI’s 2 per cent-6 per cent tolerance band in the December quarter, economists see more tightening beyond Wednesday. Citigroup Inc.’s economist Samiran Chakraborty expects the central bank to raise its inflation projection by about 10 basis points from 5 per cent while upgrading India’s growth forecast from 6.7 per cent for the fiscal year through March 2027.
Against that backdrop, Gaura Sen Gupta, chief economist at IDFC First Bank, expects a “shallow” path of rate increases totalling 75 basis points by February, “aimed primarily at preventing the real policy rate from turning negative as inflation rises. “A shift in stance could indicate a deeper tightening cycle, which appears unwarranted given that inflation remains primarily supply-side driven and growth faces two-sided risks,” Sen Gupta added.
