RBI likely to raise rates on October 5

RBI likely to raise rates on October 5

RBI Governor Urjit Patel. (File photo)

While the six-member Monetary Policy Committee (MPC), headed by RBI Governor Urjit Patel, began its three-day meet on Wednesday to decide on the key policy rates, experts say that the central bank would go for a 25 basis points hike to counter the impact of rising oil prices on inflation.

The repo rate currently stands at 6.50%. In August this year, the RBI hiked repo rate by 25 basis points to 6.50%. 

Repo rate is the rate at which the RBI lends money to commercial banks in the event of any shortfall of funds.

The SBI, in its research report, Ecowrap, said the RBI should raise the policy repo rate at least 25 basis points to arrest the rupee's fall, as on Wednesday the rupee crashed below the 73 mark against the dollar for the first time ever.

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

Morgan Stanley too in a report said it expects the RBI to hike the short term rates at its October meeting.

It said it remains bearish on the rupee despite the recent emerging market (EM) stabilisation as there are concerns about the recent default of a local financial institution, oil prices and a widening fiscal deficit persist.

"The default has led to a rise in corporate spreads and increases the refinancing pressure on domestic financial institutions at a time when our economist expects the RBI to hike at its October meeting," the Morgan Stanley report said.

The debt market has seen the highest outflow of the amount, of Rs 50,025 crore. Experts suggest that the interest rate differential with the United States has propelled the outflow.

On June 14, the Federal Reserve Board had approved of increasing the discount rate (the primary credit rate) at the Bank from 1.75% to 2% with immediate effect. Owing to this, the markets saw an outflow of Rs 10,970 crore in the markets by FIIs and FPIs.

However, as the RBI hiked its repo rate on inflation concerns in August, the debt markets have seen an inflow worth Rs 5,272 crore.

A Kotak Economic Research report said the MPC will likely increase the repo rate by 25 bps in the October policy based on the implied impact of expected cyclical recovery in growth, rupee depreciation, and crude price movement on the medium term inflation trajectory.