SBI Research expects RBI to raise repo rate by 25 bps to 5.75% in December

The impact of inflation is now set to show up in loan instalments as well as household budgets. The Reserve Bank of India (RBI) may take a major decision on interest rates at its Monetary Policy Committee (MPC) meeting in December, which could add considerably to the burden on ordinary people.

According to a report by SBI Research, the central bank raised the repo rate recently. The RBI may now raise it again, by 0.25 per cent or 25 basis points. The report also says a sudden large hike of 0.50 per cent in one go is unlikely.

According to government data, retail inflation has risen to 6.09 per cent. This is the first time since the new series of data began that inflation has gone above the RBI's target band of 2 to 6 per cent. The report says inflation could stay above 6 per cent next month but is expected to fall after that. How this fluctuation plays out will also have to be watched.

SBI Research says the repo rate could rise from the current 5.50 per cent to 5.75 per cent at the December meeting. The report says there are signs of relief in some pressures linked to inflation, the rupee and international markets. Even so, a modest rate increase remains likely in view of economic conditions.

SBI Research says the likelihood of several consecutive rate hikes is now diminishing. According to the report, the terminal repo rate could be around 6 per cent, and it is likely to settle at 5.75 per cent. Instead of raising the rate again in February, the central bank may decide on the basis of economic data. The December MPC meeting will therefore be important for the public, borrowers and investors. The final decision on any change in the repo rate rests with the RBI.

The report also lists some positive signs for India. An improving climate for the artificial intelligence (AI) sector could add to the appeal of the Indian market, and investment by foreign institutional investors (FIIs) is likely to rise as a result.

According to the report, FII investment has reached about $7.65 billion since November 6. In addition, hopes of easing tension between the US and Iran could bring relief in crude oil prices. Oil prices have fallen about 11 per cent since the US elections. The average price is estimated at about $87 a barrel.