The RBI's policy comes to fruition: RBI should anticipate a rise in interest rates by 25 basis points as inflation is likely to increase

Mumbai: Indian central bank could raise the benchmark rate by a quarter of a percentage point for the second time in two months, citing upside risks for inflation, a survey AND before the meeting this week's bimonthly on funding costing shown.

In the survey of 22 market participants, more than half of respondents said they expect a 25 basis point increase in the crucial rate, with the Reserve Bank of India continuing its price watch after the Monetary Policy Committee had increased the cost of financing in June – the first increase since the administration Narendra Modi was voted in power.

"There has been a gradual deterioration in the outlook for inflation since the June RBI policy meeting," said Shashank Mendiratta, an Indian economist at ANZ Bank. "The RBI has highlighted several long-standing risks to inflation.The main ones are rising oil prices, the volatility of global financial markets and the rise in minimum support prices (MSP) for agricultural crops. "

Consumer prices in India rose 5% in June from the previous year, following a 4.87% increase in May. With that, the pace of retail inflation has climbed for the third consecutive month.

During the June policy, RBI had stated that its future rate movements would depend on data, including the impact of farm support prices, crude oil movements and higher allocations to employees of the company. government.

"A rate hike will reaffirm its commitment to the inflation targeting framework and play an important role in reducing risks to macroeconomic stability in the midst of several global uncertainties," said economist Anubhuti Sahay chief at Standard Chartered Bank.

Although a rate hike is possible on Wednesday, few predict a shift in policy direction in favor of a prolonged period of tightening rates. RBI's current position is neutral. Even crude oil prices, which jumped to $ 80 a barrel, traded between $ 72 and $ 74 per barrel.

Oil will return to the range of $ 45 to $ 65 per barrel (in the next two years), based on factors such as American shale production and supply cuts in the United States. OPEC (Organization of Petroleum Exporting Countries). Moody's rating company & # 39; s.

"Given the preference for non-commitment on the way forward and the volatility of world oil / food prices, the attitude should remain neutral," said Radhika Rao, economist at DBS Bank. "A preemptive movement is preferable to avoid a tightening of inflationary expectations, also in the light of national expansionary policies."

In June, the RBI had revised the forecast of consumer inflation to 4.8-4.9 percent between April and September and to 4.7 percent in the second half of the year. fiscal year. The pricing power of firms and the output gap also play an important role in the evolution of inflation, with stronger trends allowing for a more complete pass-through of higher input costs.

A weakened rupiah is also inflationary, increasing the supply of money on the market. The local unit hit a new record at $ 69.13 on July 20th. She lost more than 7% that year.

"Monetary policy is not limited to the current situation: the reporting function of the policy is prospective and articulated to anchor inflationary expectations at least a year later," said Sugata Bhattacharya, chief economist of Axis Bank.

New Delhi, meanwhile, raised minimum support prices (MSP) on agricultural production at a rate that was 50% higher than costs.

"A slight upward adjustment in the projection of inflation could come from RBI, which will account for the impact of the MSP," said Shubhada Rao, chief economist at Yes Bank.