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The Reserve Bank of India (RBI) may raise interest rates in October, though any rate-hike cycle is expected to remain shallow, with the central bank likely to maintain its broader focus on liquidity and foreign exchange management, according to a report by Emkay Global Financial Services.
As per the report, the recent shifts in the domestic and global macroeconomic environment have increased the likelihood of the Reserve Bank of India (RBI) raising interest rates at its October Monetary Policy Committee (MPC) meeting. We expect any hiking cycle to be a shallow one, with the broader focus remaining on liquidity and FX management, it said. The report pointed to three key developments behind the changing rate outlook. Foreign Currency Non-Resident (FCNR) inflows have reached around USD 136 billion, significantly exceeding expectations, while Brent crude oil prices have climbed above USD 100 per barrel amid renewed tensions in the Middle East. At the time of reporting, Brent crude was trading at around USD 107.06 per barrel while crude oil was trading at around USD 102.92 per barrel. Oil prices rose around 3 per cent in early Asian trade on Monday as escalating tensions in the Middle East raised concerns over crude supply disruptions. Brent crude climbed about 3.2 per cent to USD 108 a barrel, while West Texas Intermediate (WTI) rose 3.2 per cent to around USD 103.30 a barrel amid risks to key oil infrastructure and shipping routes. At the same time, global monetary policy is showing signs of entering a fresh, though potentially shallow, tightening cycle. The European Central Bank (ECB) raised interest rates last week, while the Bank of Japan (BoJ) and the US Federal Reserve are also expected to follow with rate hikes. Amid this backdrop, the RBIs October MPC meeting is a live one, with the odds of a rate hike now much higher than earlier, it noted adding a rate increase could also help align the RBIs monetary policy stance with its liquidity management measures. This would also allow the RBIs policy and liquidity stance to align, with the RBI looking to drain excess liquidity of ~Rs4.3-4.7trn due to the FCNR+ flows. Overall, Emkay expects any rate-hike cycle to remain shallow, with the RBIs broader policy focus likely to remain on managing domestic liquidity and foreign exchange conditions. (ANI)
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