Interest rate alert! RBI may hike repo rate by 25 bps

The Reserve Bank of India is widely expected to increase its repurchase rate by 25 basis points (bps) when it unveils the monetary policy on Friday, as it seeks to curb the potential inflationary impact from rising crude oil prices and a weakening currency.

At its bi-monthly review in August, the central bank lifted the key short-term lending rate, also called repo rate, by 25 basis points for a second straight time to 6.5 per cent, citing upside risks to inflation on account of an increase in the minimum support price for crops, and higher crude oil prices.

"The RBI policy meet is the key event and the market is pricing in a 25 bps hike," said Vinod Nair, Head of Research at Geojit Financial Services.

Global oil prices have been on a boil, hurting the rupee, as India imports nearly 80 per cent of its crude requirements.

Higher interest rates in the US, and a tariff war initiated by President Donald Trump have also sent the Indian currency on a downward spiral. On Wednesday, the currency hit a record low of 73.42 against the US dollar.

Concerns about rising inflation, intensifying trade war and capital outflows have had an adverse impact on the Indian currency, analysts said. It has fallen nearly 15 per cent so far in 2018, the worst performer among its other Asian peers.

Brent crude oil price was hovering near $85 per barrel in trade on Wednesday.

Last week, the US Federal Reserve raised interest rates for a third time this year, boosting the dollar. The Fed is on course for at least another increase this year.

A higher interest rate in the US will likely prompt the RBI to tighten the policy rate despite a relatively tame inflation, as the central bank seeks to cushion the rupee`s fall, the analysts said.

Retail inflation in August increased 3.69 per cent, slowing from 4.17 per cent in the previous month.

State Bank of India in its Ecowrap research report last week said that the RBI will likely hike the repo rate by 25 bps in October, warning that the increase may not be the last one in the current fiscal year to March 31.

"We rule out a hike of 50 basis points, as it may spook the market. However, there is a probability that the central bank would change the stance from `neutral` too, as three successive rate hikes with a `neutral` stance could contradict the RBI message," the report said.

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The RBI maintained its "neutral" stance in the August policy review, as it had done over the previous five bi-monthly policy reviews, which allows it to move either way on rates.