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RBI Policy: Rate hike on the cards as sinking rupee likely to keep pressure on inflation

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The Reserve Bank of India (RBI) will probably raise interest rates by a quarter of a percentage point on Friday and provide guidance on curbing rupee's fall.

RBI Policy: Rate hike on the cards as sinking rupee likely to keep pressure on inflation
The Reserve Bank of India (RBI) will probably raise interest rates by a quarter of a percentage point on Friday and provide guidance on curbing rupee's fall.
The predicted rate hike would be the RBI’s third this year, after it lifted borrowing costs in June and August. The central bank’s hawkish tilt, despite relatively tame inflation, is to prop up a retreating rupee, according to economists.
The resolution of the RBI’s monetary policy committee (MPC) meeting for the fourth bi-monthly monetary policy review for 2018-19 will be announced after 2.30pm on October 6.
A majority of the economists in CNBC-TV18’s MPC have asked for a rate hike looking at the sheer plunge in rupee.
The rupee is the worst performing emerging market currency having lost almost 14 percent since January this year. Between April and September the rupee has plummeted more than 7 to the dollar and has breached the psychological 73 mark last week.
On Thursday the rupee was trading at 73.64 a dollar, down 30 paise, from its previous close of 73.34.
Inflation Worries
Also the sharp fall in the rupee has stirred worries about rise in inflation, which was just under 3.7 percent in August, slightly below the RBI’s 4 percent target.
"I think the data point for me which will be most important in the October policy is how much inflation expectations have gone up in comparison to the August policy and that is the thing that will drive the RBI policy," said Samiran Chakraborty, chief economist at Citi.
According to Chakraborty, if inflation expectations have gone up, then regardless of the near term decline in inflation, "RBI would be wary of the fact that this financial stability argument can actually go head and destabilise the inflationary expectations as well."
Sajjid Chinoy, Asia Economics at JP Morgan, echoed a similar view," ... Policy rate should be set keeping in mind one year inflation projections ahead and that should not change."
According to a Reuters poll, retail inflation is forecast to rise to 5 percent by the middle of 2019. Soumya Kanti Ghosh, group chief economic advisor at State Bank of India, expects average inflation for this year around 4.4 percent and a year ahead around 4.8 percent.
According to Pronab Sen, former principal adviser of the planning commission, RBI not only has to focus on inflation targeting but even financial stability has to be addressed.
"The question, of course, is that how should they position themselves? Because the finance ministry is already taken a whole bunch of steps mostly contractionary in nature. They will have to talk about that, they will have to say whether the further monetary contraction is called for, so this discussion is going to have to be there," said Sen.
On the contrary, Sonal Varma, India chief economist at Nomura, said the MPC should focus on inflation and that it should not hike rates to defend the currency.
Policy Expectations
Chakraborty: 25 basis point hike.
Ghosh: 25 basis point hike.
Chinoy: 25 basis point hike.
Varma: Hold.
Sen: Hold.
Drop In Neutral Policy Stance?
Chakraborty: Change of stance.
Ghosh: Change of stance.
Chinoy: Change of stance.
Varma: Neutral.
Sen: Neutral.
 
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