The six-member Monetary Policy Committee (MPC), headed by RBI governor Urjit Patel, began three-day deliberations Wednesday to decide on the key policy rates amid expectations that it would go for a 25 basis points hike to counter the impact of rising oil prices on inflation.
If the RBI raises the interest rate on Friday, it would be third in a row. It hiked key policy rate in this fiscal's second bi-monthly policy in June after a hiatus of four-and-a-half years. Subsequently, the RBI raised the repo rate or short term lending rate by another 25 basis points in August policy meet.
After two successive hikes, the repo rate currently stands at 6.50 per cent.
According to experts, rising crude oil prices, depreciating rupee and widening current account deficit are some of the factors the policy making body would keep in mind while deciding on interest rates.
The rupee Wednesday weakened further to 73.25 against the US dollar while brent crude was trading near $85 per barrel.
"With petrol and diesel prices moving up, there is a strong expectation that inflation will also move up. So, they (RBI) may take a pre-emptive action. I feel there will be an increase of 25 basis points in the repo rate," Union Bank of India managing director and chief executive Rajkiran Rai G said.
Despite the rise in oil prices, the headline inflation number came down to 3.69 per cent for August as against 4.17 per cent for July.
The government has mandated the Reserve Bank to keep inflation within a band of 2-6 per cent.
Experts says the weaker trend in the rupee may also prompt the central bank to raise repo rate.
Tracking global developments, the rupee has become weak and is hovering around 73 against the dollar.
The SBI, in its research report Ecowrap, said the RBI should raise the policy repo rate by at least 25 basis points to arrest the rupee's fall.
"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.