RBI May Raise Rates By 25 Basis Points In October, Economists Flag Rising Oil Prices And Inflation

New Delhi: Economists expect the Reserve Bank of India to start raising interest rates at its October policy meeting, as higher oil prices and rising inflation strengthen the case for early action.

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The Monetary Policy Committee will meet from October 5 to 7 to decide the benchmark repo rate. Some economists have brought forward their earlier forecast of a December increase.

October hike gains support

Bank of America now expects a 25 basis point increase in October, citing higher energy costs, food inflation and wider price pressures. A rise of 25 basis points equals 0.25 percentage points.

The bank said the RBI appeared ready to begin withdrawing policy support after almost two years of monetary accommodation.

SBI Research also said risks had shifted firmly towards a 25 basis point increase. It pointed to spreading inflation, worsening global conditions, changing liquidity and a fresh reassessment of risks across markets.

The report argued that acting early would be prudent amid geopolitical tensions and uncertainty over crude prices.

Inflation and oil pose risks

Retail inflation climbed to 4.82 percent in August from 4.45 per cent in July, adding pressure on policymakers.

Strong El Nino conditions and the possibility of below-normal rainfall in October could create further risks for the winter crop, the report said.

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Higher crude prices and rising global bond yields have also reduced the RBI’s room to keep rates unchanged.

BNP Paribas India said the country’s economic outlook had weakened in recent weeks, with Brent crude crossing $100 a barrel and US Treasury yields moving towards 5 per cent.

Nomura expects limited increases

Nomura, however, expects the RBI to limit increases to 25–50 basis points during this cycle.

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Its analysts believe markets are expecting sharper tightening than conditions justify. They assigned an 80 per cent probability to a limited policy adjustment, rather than a broader cycle involving rate increases exceeding 75 basis points.

The final decision rests with the MPC.

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