Rate hike talk grows ahead of RBI MPC meet, home and car loans may get costlier
Economists say the RBI may begin raising interest rates at its October 5-7 policy meeting, which could make home and car loans more expensive.
The Monetary Policy Committee (MPC) of the Reserve Bank of India will meet next week to decide on the standard repo rate. The meeting will be held from October 5 to 7. Ahead of it, economists say the central bank could begin raising interest rates, and there is talk of whether home loans and car loans will become costlier.
The hike was earlier expected in December. It is now estimated to begin in October itself. According to Bank of America, rising energy prices, food inflation and broad-based inflationary pressure make a 25 basis point (bps) hike in October more likely than its earlier December forecast.
BofA has said, "After nearly two years of monetary policy easing, the RBI appears ready to take initial steps to withdraw policy support in the October MPC. We therefore believe the RBI will hike rates by 25 bps in the October MPC."
SBI Research has also said in its report that the risk of a 25 bps hike has risen significantly this time. Rising inflationary pressure, a worsening global situation, liquidity conditions and a reassessment of global risks are strengthening the case for pre-emptive action, it said.
According to the SBI report, given geopolitical tensions, crude oil price risks and the reassessment of global risks, "it would be prudent for us to act pre-emptively rather than fall behind the curve." Inflation is now rising fast. Consumer Price Index (CPI) inflation rose from 4.45 per cent in July to 4.82 per cent in August. The report also said a severe El Nino and below-normal rainfall in October could pose further risks to rabi crop output.
Rising crude oil prices, inflation and rising global bond yields have reduced the chance of the RBI holding rates steady. Another report, by BNP Paribas India, says India's macroeconomic outlook has weakened over the past few weeks, as Brent crude has risen above $100 a barrel and US 10-year Treasury yields have moved towards 5 per cent.
Analysts at global brokerage Nomura say the RBI could limit rate hikes in the current cycle to 25 to 50 basis points. Markets, meanwhile, are expecting tighter policy. By Nomura's estimate, there is an 80 per cent chance of a limited hike rather than broader tightening of more than 75 basis points.
Basis points (bps) are a standard unit used in finance and banking to measure small changes in interest rates or yields.
