Opinion | Why the RBI is likely to increase rates
It will look at the end-March 2019 CPI projection to calculate where policy rates need to be currently
Since 1 August, the day of the last Reserve Bank of India (RBI) policy meeting, the rupee has depreciated almost 6% against the dollar, and year to date, the currency pair is down more than 12%. A number of external factors—a strong dollar, high crude oil prices leading to a deterioration in balance of payments, depreciating Chinese renminbi and contagion risks from other emerging market countries—have combined to push the rupee to record low levels. Against this backdrop, we expect RBI to hike the policy repo rate by 25 basis points on 5 October and also change the monetary policy stance to hawkish from neutral. Beyond October, we expect RBI to hike again in December and April by 25 basis point each, thereby taking the terminal repo rate to 7.25%. We think RBI will stress on three related factors for justifying a rate hike in the October policy.