With rise in WPI, Street expects RBI to raise repo

In September, inflation stood at 6.46%, the highest since February

Following the rise in Wholesale Price Index (WPI)-based inflation in September, most experts expect the Reserve Bank of India (RBI) to raise the repo rate (the rate at which banks borrow from the central bank’s liquidity adjustment facility) 25 basis points at the second quarter monetary policy review later this month.

In September, WPI inflation stood at 6.46 per cent, the highest since February 2013, primarily driven by high food prices. In August, it stood at 6.1 per cent. In September, Consumer Price Index-based inflation stood at 9.84 per cent.

At its mid-quarter monetary policy review last month, RBI had raised the repo rate 25 basis points. It had also flagged concern on the inflation front. Currently, the repo rate stands at 7.5 per cent.

“RBI has only one choice — keep tightening policy, and by more than market expectations. We are currently forecasting a further 50-basis-point tightening from RBI, but now we have real concern the forecast is too dovish. Another large surprise in the WPI would warrant an upward revision to expected tightening by RBI in this cycle,” Glenn Maguire, chief economist, Asia-Pacific, ANZ, said in a note to clients.

In a research note, CRISIL said at the previous policy review, RBI Governor Raghuram Rajan had stressed inflation control as a priority. With inflation now out of RBI’s comfort zone for consecutive months, a 25-basis-point repo rate rise was likely, it said.

Dhananjay Sinha, head of institutional research, Emkay Global Financial Services, said, “Considering our assessment of the inflation scenario, we believe further narrowing the repo-marginal standing facility (MSF) window to 100 basis points needs to come from a hike in the repo rate; we expect a 25-basis-point rise in the October 29 policy announcement.”

A few are hoping the MSF rate would again be cut on October 29, due to which the spread between the repo rate and the MSF rate would be reduced to 100 basis points. “There are more chances of the MSF falling than anything else. To bring the gap between MSF and the repo rate to 100 basis points, one has to bring down MSF or raise the repo.

So, the MSF rate is definitely on a downward trend. RBI may cut the MSF rate 50 basis points and then, the margin between the MSF and the repo would again be 100 basis points,” said Romesh Sobti, managing director and chief executive of IndusInd Bank.

Meanwhile, owing to the rise in WPI-based inflation, government bond yields rose on Monday. The yield on the 10-year benchmark 7.16 per cent government bond closed at 8.59 per cent, against the previous close of 8.49 per cent.