Market verdict: Expect 25 bps rate hike on Wednesday

Discussions have now shifted from whether RBI will increase rates on Wednesday to by how much

The discussions have shifted from whether the Reserve Bank of India will increase rates in Wednesday's monetary policy to by how much. With the November Consumer Price Index (CPI) inflation rising to 11.24% compared to 10.17% in the previous month, most experts are expecting a 25 basis points increase in the repo rate.

 

In the current fiscal so far, the RBI has already hiked the repo rate twice. The last hike of 25 basis points was in the second-quarter monetary policy review held on October 29. A further hike of 25 basis points will result in the repo rate going up to 8%, the same level at the start of the year.

 

“Given the large negative surprise on the CPI inflation front, I think the RBI will be reacting with a further repo rate hike on December 18. Since the rise is primarily driven by food inflation, the hike would probably be limited to 25 basis points. Given the increased expectations of a rate hike, both the bond yields and the rupee would be under pressure, with the 10-year benchmark bond moving towards 9% and the rupee testing Rs 62.50 over the next couple of days,” said  Brijen Puri, executive director and head of markets, JP Morgan.

 

A few economists had expected a status quo on key policy rates in the mid-quarter monetary policy review. But after the surprise numbers on the inflation front, they have now revised their expectations. “The CPI inflation numbers are very disappointing. Till the numbers were released, I was expecting RBI to maintain status quo this time. But now I am completely convinced of a further hike in the repo rate by 25 basis points. If the rise in inflation carries on, then RBI might actually go for another hike in January,” said Saugata Bhattacharya, chief economist, Axis Bank.

 

Economists also expect RBI to acknowledge that inflation is much higher than what was anticipated by them. “RBI will have to acknowledge that inflation trajectory has surpassed their expectations. We are expecting a further hike of 25 basis points in repo rate on Wednesday,” said Samiran Chakraborty, managing director, regional head of research, South Asia Global Research, Standard Chartered Bank.

 

Now the street awaits Wholesale Price Index (WPI) inflation data to be released on Monday for November. WPI inflation rose to 7% in October from 6.46% in the previous month. According to Soumya Kanti Ghosh, chief economic advisor, State Bank of India weak growth impulse as indicated by Index of Industrial Production (IIP), the decline in core CPI and a correction in CPI food component will weigh on RBI’s mind before taking decision on repo rate hike. “RBI may take final call on rate keeping in mind reading on WPI for November,” he said.