Why We May See Two Interest Rate Hikes From RBI This Year?

The Banker's Bank - Reserve Bank of India (RBI), is expected to raise the interest rates starting from next month or August 2018. The central bank may go on for three rate hikes by the mid-June 2019, taking the key policy rate to 6.75 percent.

While a June interest rate hike was off the table, it is not anymore. The Monetary Policy Committee, is scheduled to meet early next month. Two out of the six members are clearly in favour of tightening the monetary policy.

Will a few more join the list?

If one or two more members favour a tightening, we could see a rate hike as early as June, 2018. The one big reason why it could even happen in June is on account of surging crude prices. This month Brent crude has surged past the $80 levels, something we have not seen in the last three and half years. Remember, rising crude tends to bring in imported inflation, as most of our crude oil demand is fuelled through imports.

In India, retail petrol and diesel prices have reached peak levels and near historic highs. This may prompt the Monetary Policy Committee to tilt in favour of a rate hike, as fuel prices could push inflation significantly higher. A falling rupee is compounding the misery, increasing retail fuel price even more. Remember, bond yields have already surged on rising inflation to hit 7.84 per cent. The committee would also want to ensure that it does not remain significantly behind the curve.

If the RBI takes action in June, 2018, we could see borrowing costs rise, especially loans. Fixed deposit interest rates are also likely to go higher, as cost of funds increases.

Investors in India are unhappy with the present rate of interest offered by most of the major banks in India. Currently, the banks in India are offering a rate of interest ranging between 4% - 6% per annum on the fixed deposits whose maturity period ranges from 1 year to 5 years.

RBI raised its repo rate from 7.75 percent to 8.00 percent, the last time during January 2014. Starting from January 2015, RBI has decreased the repo rates during every quarter and currently, the repo rates stand at 6.00 percent, constantly since August 2017.

Interest rates are determined by the respective country's central bank. In order to arrive at the interest rate, a government's economic observers create a policy that helps to ensure stable prices and liquidity in the economy. This policy will be routinely checked in order to maintain that the supply of money in the economy is neither too high nor too low.

If the supply of money in the economy is too high then it will lead to the increase in the prices and if the supply of money is less then it will decrease the prices.

If the monetary policymakers wish to decrease the money supply, then they will increase the interest rate which makes the deposit funds more attractive and will further reduce borrowing from the central bank.

Conversely, if the central bank wishes to increase the money supply in the economy, then they will decrease the interest rate, and thus make the borrowing more attractive and spend money.

Currently, there is more money supply in the Indian market post demonetization, to arrest the same, the RBI may hike interest rates later this year to attract the money from the economy towards deposit funds.