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The discussions have shifted from whether the Reserve Bank of India (RBI) will increase rates in Wednesday's monetary policy review to by how much.
With Consumer Price Index (CPI)-based inflation for November having risen to 11.24 per cent compared to 10.17 per cent in October, most experts are expecting a 25-basis point (bp) increase in the repo rate.
In the current financial year (from April 1) RBI has twice raised this rate (at which it lends to banks for the short term). The previous rise of 25 bps was in the second-quarter review on October 29. A further rise of 25 basis points (bps) will result in the repo rate going up to eight per cent, the level at the start of the year.
"Given the large negative surprise on the CPI inflation front, I think 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 bps. Given the increased expectations of a rate hike, both bond yields and the rupee would be under pressure, with the 10-year benchmark bond moving towards nine per cent and the rupee testing 62.5 (to the dollar) over the next couple of days," said Brijen Puri, executive director and head of markets, JPMorgan.
Some economists had expected key policy rates to be unchanged in the mid-quarter review. They've revised these expectations after the surprise in numbers on the inflation front. "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 bps. If the rise in inflation carries on, RBI might 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 it had earlier anticipated. "RBI will have to acknowledge that the inflation trajectory has surpassed their expectations. We are expecting a further hike of 25 bps in the repo rate on Wednesday," said Samiran Chakraborty, managing director and head of South Asia Global Research, Standard Chartered Bank.
The Street awaits Wholesale Price Index (WPI)-based inflation data for November to be released on Monday. WPI inflation rose to seven per cent in October from 6.46 per cent the previous month. According to Soumya Kanti Ghosh, chief economic advisor, State Bank of India, a weak growth impulse as indicated by the Index of Industrial Production, the decline in core CPI and a correction in the CPI food component will weigh on RBI's mind before taking a decision on a repo rate rise.
