The Monetary Policy Committee is likely to hike the benchmark rate by 35-50 basis points as it fights multiple challenges of escalating geopolitical tension in Ukraine, a hawkish US Fed, plunging rupee, mixed growth signals, and rising food inflation
(left)US Federal Reserve Chairman Jerome Powell and RBI governor Shashikanta Das
Image: Das: Indranil Aditya/NurPhoto via Getty Images; Powell: Drew Angerer/Getty Images
The Reserve Bank of India’s (RBI) six-member rate setting panel will meet next week to frame the bi-monthly monetary policy. In its meeting in August, inflation seemed to be on a downward trajectory and growth prospects appeared rosy. This time around, higher food prices pose a big concern, and several ratings agencies have slashed India’s growth outlook for the current fiscal.
On the global front, the situation in Ukraine may worsen with Russia announcing partial military mobilisation for its citizens, stoking growth challenges and uncertainty. Most importantly, a relentless US Federal Reserve—that is determined to stamp out historically high inflation with a series of steep rate hikes—may roil market sentiments.
This, of course, has worldwide ripple effects for markets and economies. This will weigh on the Monetary Policy Committee (MPC) members’ agenda when it meets on September 28. “With this level of hawkishness from the US Fed, it would be extremely difficult for the RBI to soften its tone on the domestic monetary policy anytime soon. India doesn't have that much of an inflation problem, but our external balances are not in the best shape. RBI's foreign exchange reserves are also dwindling at a very fast pace,” says Pankaj Pathak, fund manager-fixed income, Quantum AMC.
Mint Street traders felt the pinch hours after markets opened and the rupee sunk to a lifetime low of 80.61 against the greenback, marking the likelihood of the rupee plunging towards 81 in the coming days. Much like the Asian peers, India’s equity markets felt the jitters too. At 12:25 pm, the S&P BSE Sensex was trading in the red, down by about 540 points at 58,928.