Reserve Bank of India (RBI) governor Raghuram Rajan is expected to hike the repo rate, the rate of interest at which it lends to banks, by 0.25 percentage points again in the quarterly credit policy on Tuesday, which may send up your EMIs (equated monthly installments).
“We believe that the key driver for a repo rate hike would be to anchor inflation expectations, and to move towards non-negative real interest rates to improve the savings propensity in the economy,” said Indranil Pan, chief economist, Kotak Mahindra Bank.
In his policy review debut, Rajan had last month surprised markets by raising repo rate by 0.25% to 7.5% in a bid to check inflation. Prices have however continued to spiral.
A repo rate hike forces banks to hike their lending rates as their borrowing costs rise. High food prices pushed up the September wholesale price Index (WPI) based inflation to a seven-month high of 6.46%. Retail inflation too rose, to 9.84%, during the month.
The central bank is also expected to slash the Marginal Standing Facility (MSF) rate —the rate at which the RBI lends emergency funds to banks — in view of the stability in the rupee.
“RBI has been indicating that it will continue to remove the monetary tightening measures as allowed by external funding risks. With this guidance in mind and the recent stabilisation of currency and increasing probability of delay in US Fed tapering of quantitative easing, we expect the RBI to cut MSF rate by 0.25 percentage points to 8.75% on October 29,” said Chetan Ahya, economist, Morgan Stanley.