Why RBI is set to raise bank rates again
The low inflation numbers that have come in should have actually been good news for interest rates. The consumer price inflation in August came down to 3.7 year-on-year from 4.2 per cent in July. A consumer price index (CPI) measures changes in the price level of market basket of consumer goods and services purchased by households.
Meanwhile, the Wholesale Price Index (WPI) based inflation for August declined to 4.5 per cent as against 5.1 per cent in July and 5.7 per cent in June this year. However, inflation for August is 1.3 per cent higher than 3.2 per cent witnessed in the same period the previous year. The moderation in August can largely be attributed to the contraction in WPI for primary articles (food articles), a meagre decline in fuel and power products and high base effect, says a research note from Care Ratings.
Meanwhile, industrial production momentum remained broadly unchanged. A note from HSBC says growth is likely to moderate towards its trend (of 7.1 per cent) by the end of the year.
However, many believe that the Reserve Bank of India (RBI) will continue to tighten rates further, raising the repo rate, or the rate at which the central banks lend to commercial banks in the event of any shortfall of funds, by 25 basis points in the fourth quarter of 2018. One basis points in one-hundredth of a percentage point.
In August, the RBI’s Monetary Policy Committee (MPC) had raised the repo rate by 25 basis points to 6.50 per cent. It was the first time since October 2013 that the rate was increased at consecutive policy meetings. In June this year, the MPC also increased the key rate by 25 bps. This will make banks increase their lending rates in turn, making home and industrial loans costlier.
Moreover, the country’s GDP growth is also expected to moderate from 8.2 per cent in the first quarter of 2018-19 to 7.1 per cent by the end of the year. This, says HSBC, is due to a normalising base, high oil prices and tighter financial conditions. While a softening in growth could take some pressure off core inflation, it could be offset by higher oil prices and a weaker rupee, the report adds.
(Courtesy of Mail Today)