Borrowing costs

RBI MPC meet: The question is not whether to raise borrowing costs but by how much

As Indian monetary policymakers band together to find ways to tame inflation, the question for them is not whether to raise borrowing costs, but by how much.

The six-member monetary policy committee will likely raise the benchmark interest rate by 40 basis points to 4.8% on Wednesday, according to the median of a Bloomberg survey of 37 economists. On Monday, the poll returned what is by far the most varied number of forecast hikes, ranging from 25 basis points to 75 basis points.

With Wednesday’s policy decision following May’s surprise off-cycle 40 basis point hike, expectations have narrowed to the size of the hike to rein in inflation that exceeds the 2% target range at 6% from the central bank since the beginning of this year. Wholesale prices have risen at the fastest rate in more than three decades, increasing pressure on businesses to pass on high costs to consumers.

“Given the high inflation trajectory, RBI will have to anticipate rate hikes,” said Kaushik Das, chief India economist at Deutsche Bank AG. Decisive action at this point will go a long way to containing inflation, he added.

Here’s what to watch for in Governor Shaktikanta Das’ speech after the 10 a.m. MPC meeting in Mumbai:

Forecast revision

Analysts will be watching the central bank’s stance on the path of inflation closely, especially after Prime Minister Narendra Modi’s government announced fiscal measures alongside monetary efforts to rein in prices.

Economists at Barclays Plc and Citigroup Inc. see the RBI raising its average inflation forecast for the year ending March to more than 6% from 5.7% previously.

The government’s $26 billion tax package aimed at easing price pressures by lowering some retail fuel taxes on imports may not bring immediate respite to the inflation-targeting RBI, said Rahul Bajoria, an economist at Barclays.


While inflation concerns may keep the RBI focused on prices, near-term growth impulses remain largely flat, according to Nomura Holdings Inc. economists Sonal Varma and Aurodeep Nandi. They do not expect a “significant downgrade” in growth forecasts in politics.

Terminal tariff

The forecast would also act as an indication of how far higher rates will rise in the current cycle, with some analysts seeing borrowing costs rise above pre-pandemic levels.

Governor Das’ reluctance in a recent interview to commit to the pre-pandemic rate of 5.15% may be an indication of the MPC’s determination to increase the main redemption rate beyond that over the past few years. upcoming meetings, said Ananth Narayan, senior India analyst at Observatory Group.

Market view

Bond traders will be looking for clarification from Das on specific actions the central bank plans to take to reduce government borrowing costs. 10-year bond yields hit 7.5% on Monday, for the first time since 2019, as the MPC began its three-day meeting.

The market is also worried about additional borrowing after the government’s fiscal package, but the current inflation and liquidity backdrop may not allow the RBI to make immediate bond purchases in the secondary market, the officials said. Citibank analysts including Samiran Chakraborty, who said 10-year bond yields may approach 8%.


“The bond market is already positioned for early rate hikes,” said Pankaj Pathak, bond fund manager at Quantum Asset Management Co. Any rate hike below the expected 40-50 basis points will be a “positive surprise.” leading to a marginal easing of short-term bond yields.