Sharper, bigger RBI moves coming in December? SBI economists put things in perspective
The recommendations come as the central bank manages inflation risks alongside pressure on the rupee and capital flows. A 50-basis-point increase in December would mark a sharper pace of tightening than Wednesday's hike, if inflation and global conditions take the expected path.
State Bank of India economists have cautioned that the Reserve Bank of India (RBI) could introduce a stronger monetary tightening move in December, as pressures from high inflation and a more unstable global economy loom, according to reports on October 7. The economists expect the central bank to lift the benchmark repo rate by 50 basis points at its forthcoming monetary policy review, driving it to 6% from the present 5.50%.
This projection comes after the RBI's recent 25-basis-point increase in the repo rate to 5.50%, the first such rise in nearly four years. The central bank also adopted a "calibrated tightening" stance, described by SBI economists as a firm policy signal.
Rising inflation may necessitate a bigger rate hike at the December meeting, the economists noted, while acknowledging that the decision would hinge on global conditions as well. They also anticipate heightened volatility in global markets and economies in the days to come. The economists anticipate the repo rate to reach 6% as the most suitable course of action.
Before Wednesday's policy announcement, several economists and market observers had projected two 25-basis-point rate increases, including one at the December review. SBI also advocated for a transparent policy framework on artificial intelligence, arguing that clearer guidelines could encourage capital inflows and bolster the rupee.
The currency slipped 43 paise against the US dollar on Wednesday, closing at 96.78. SBI proposed several measures to support the rupee, such as a graded structure for long-term capital gains tax with a reduced rate beyond a reasonable holding period of three years and above. They also suggested widening the effective interest rate corridor through a decisive increase in the Marginal Standing Facility (MSF) rate, even if implemented temporarily.
The bank urged the RBI to maintain liquidity management measures as it grapples with inflation concerns alongside the weakening rupee and capital flows. A 50-basis-point rate increase in December would represent a more aggressive pace of tightening compared to the 25-basis-point move announced on Wednesday, if inflation and global conditions evolve as expected.
Written by urgent.news from The Economic Times - Economy's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
