Will the Reserve Bank of India (RBI) hike the interest rate tomorrow? The RBI’s monetary policy committee (MPC) will make its next move tomorrow based on what it believes to be the trajectory of future inflation. The minutes of the previous MPC meeting in June were dominated by discussions about the impact of higher farm support prices as well as oil prices. The government has since announced higher support prices for various food items. Economists at investment bank Nomura estimate that the impact of higher support prices on headline inflation will be 20-90 basis points. The higher end of this range will take consumer price inflation within a whisker of 6%, the upper end of the RBI’s inflation target.
With global oil prices range-bound now, the other big worry should be core inflation. The June reading of core inflation was 5.89%.
So what lies ahead? The market for overnight index swaps is already pricing two more rate hikes over the next year. The more immediate question is what the MPC could do in its meeting this week. The choice is between a pre-emptive hike right away or a pause till there is more clarity on the impact of higher farm support prices on headline inflation.