The Reserve Bank of India (RBI) is likely to increase the repo rate by 25 basis points in the upcoming monetary policy review as inflation is expected to accelerate further due to higher crude prices and the weakness in rupee.
One basis point is a hundredth of a percentage point.
The monetary policy committee (MPC) will start its three-day meeting from October 3 to decide on the fourth bi-monthly monetary policy. After two successive hikes, the repo rate currently stands at 6.50 percent.
CNBC TV18's Citizens MPC comprising of Pronab Sen, former principal adviser of the planning commission, Sajjid Chinoy, Asia Economics at JP Morgan, Samiran Chakraborty, chief economist at Citi, Sonal Varma, India chief economist, Nomura and Soumya Kanti Ghosh, group chief economic advisor, State Bank of India met to discuss how the RBI can accomplish such nearly conflicting objectives.
A majority of the economists in CNBC-TV18's Citizen's MPC voted 3-2 in favour of dropping neutral stance.
On RBI's Stance:
Sajjid Chinoy, Soumya Kanti Ghosh and Samiran Chakraborty suggested a change in stance, while Pronab Sen and Sonal Varma voted in favour of a neutral stance.
On Rate Hike:
Chinoy, Ghosh and Chakraborty predicted an increase in the repo rate by 25 basis points, while Sen and Varma said the RBI will not raise the rate.
Pronab Sen, former principal adviser, planning commission
India’s first chief statistician, Pronab Sen, said rate management is the least of RBI's worries as it will depend on how the central bank weaves financial stability narrative with inflation targeting.
However, need not worry much about rate action as much as what RBI said to calm markets, Sen said.
Soumya Kanti Ghosh, group chief economic advisor, SBI
The country's largest lender, State Bank of India (SBI), said there will be no change in stance with a third successive rate hike and it won't go down well.
Ghosh said MPC and RBI can assuage market worries on liquidity and the central bank has already announced liquidity infusing steps.
Federal Reserve chairman Jerome Powell noted that neutral rate is more flexible and reactive, Ghosh added.
Samiran Chakraborty, chief economist, Citi Bank
Citi Bank said RBI policy can be more hawkish than what markets are prepared for as the central bank’s inflation projection is undershooting as a result of food prices.
According to Chakraborty, some softening of growth is required to bring down current account deficit (CAD), but RBI can't ignore the structural imbalances reflected by the deficit.
“RBI has to deal what is one-year ahead inflation expectation. If inflation expectations are high stance, it will have to change with the rate hike,” Chakraborty said.
Reverse repo outstanding amounts have jumped by 31 times in one week, Chakraborty added.
Sonal Varma, chief India economist, Nomura
Global brokerage house, Nomura, said that government is determined to keep fiscal deficit within the budgeted level of 3.3 percent of GDP (Gross domestic product) and won’t allow fiscal slippage.
However, states are set to miss their fiscal consolidation targets budgeted at the beginning of the year, said Varma.
As Goods and Services Tax (GST) collections will undershoot the target, so the government will have to cut capex, Varma added.
Sajjid Chinoy, chief India economist, JPMorgan Chase
Leading global financial services firm, JPMorgan Chase, said inflation targeting framework has served us well and should not add policy framework uncertainty.
Chinoy, there is no need for a 50 bps hike to contain inflation risks as there is a well laid out liquidity policy.
The policy is to keep liquidity enough to keep call rate close to repo rate, JPMorgan Chase added.
(With inputs from PTI)