Reserve Bank of India (RBI) governor Raghuram Rajan is widely expected to raise lending rates in its monetary policy review on Wednesday amid inflation worries that continue to haunt policymakers and households alike.
Raising interest rates is one of the ways to tame inflation. However, on the flipside, such measures make even consumer loans costlier, resulting in higher equated monthly installments (EMIs) on house and car loans, squeezing household budgets.
India’s wholesale price index (WPI)-based inflation climbed to a 14-month high of 7.52% in November against a year-ago, compared to 7% in October, mainly because of costlier food.
Retail inflation, mirroring a similar trend, also stood at a nine-month high of 11.24% in November.
With inflation above the RBI’s tolerable limits of “around 5%”, the central bank is expected to raise interest rates further
Experts expect RBI governor Raghuram Rajan to raise the repo rate —its key lending rate — by 0.25 percentage points to 8% although some experts did not rule out an even higher hike.
“We expect the RBI to announce a 0.25 percentage point hike in the repo rate at its mid-quarter monetary policy review. However, a 0.50 percentage point hike would not come as a surprise given that the high numbers for retail inflation in November,” research agency CARE said in a research report.
Rajan will also keep one eye firmly on the developments at the two-day Federal Reserve meeting that began on Tuesday amid anticipation that the US central bank will announce a calendar to wind down its easy money policy.
The rupee could fall further if the US begin “tapering” its monetary stimulus that would prompt foreign funds to move dollars away from emerging markets.