Tough cues may force RBI to hike rate by 0.25 per cent: DBS

Mumbai: With the next week’s Reserve Bank of India’s monetary policy meeting set against a challenging external and domestic environment, industry experts foresee the possibility of a 25 basis point hike in interest rates.

“RBI will emphasise on the forward-looking nature of monetary policy, as high oil prices and a weak rupee, risk hardening inflationary expectations and disrupting the benign inflation outlook,” said Radhika Rao, economist at DBS Bank.

Externally, she said the US Federal Reserve is on course to deliver its third rate hike for the year and eighth since late 2015, lifting US rates and the dollar. Sharp rise in oil prices on geopolitical tensions threaten to aggravate the deterioration in India’s external balances.

Contagion worries from the EM sell-off have taken a breather, but risks continue to lurk, also from the simmering US-China trade deadlock.

At home, volatile markets have kept the rupee at record lows. Sovereign bond yields have settled above four-year highs above 8 per cent, while foreign outflows have resumed after a hiatus in July and August.  

In this backdrop, DBS Bank believes that the RBI will emphasise on the forward-looking nature of monetary policy, as high oil prices and a weak rupee, risk hardening inflationary expectations and disrupting the benign inflation outlook. “These reasons, we believe, provide the RBI MPC with sufficient justification to hike in October, with another increase likely in December, if not sooner. A change in stance from neutral to hawkish is also likely next week,” she added.  

Morgan Stanley expects at least two rate hikes in the current financial year. It believes that a tighter global liquidity conditions would create funding pressures in economies running current account deficit (CAD). If the current account deficit is further exacerbated by loose policies and debt build up accompanies by rising inflation, this would lead to greater pressure to hike rates.