Here's Why The RBI Could Hike Interest Rates After 4 And Half Years

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    Nobody is sure, which way the Reserve Bank of India will decide on interest rates on Wednesday. The chances of the RBI hiking interest rates maybe a little higher, compared to a status quo policy.

    However, just look at some of the data and happenings around which may weigh on the mind of the Monetary Policy Committee. Two of the six members have already hinted at a hawkish stand. If just one or two more yield, we could see an interest rate hike.

    Rising crude, falling rupee, strong GDP, farmers strike....

    As we write farmers are on strike, and vegetable and milk prices are expected to soar. Petrol and diesel prices have hit new historic peaks and if crude oil does not behave, we have a massive problem on our hands.

    The consumer price inflation for April 2018 has come in at 4.58 per cent. But, what is interesting is that core inflation for the same month has jumped when compared to six months ago. It has now risen to 5.92 per cent, a good 100 basis points more than that prevailing six months ago.

    Already, banks have hiked deposit and lending rates, without the RBI hiking repo rates. There are liquidity issues and there is little doubt about that. The banking system is in a mess and few of the banks have been asked to stop lending.

    Here's Why The RBI Could Hike Interest Rates After 4 And Half Years

    Interestingly, the GDP numbers which came in at 7.7 per cent for the quarter ending March 31, 2018, provides more ammunition for the Monetary Policy Committee to hike rates. Stock markets in India fell on Monday, despite strong global cues, as markets seem to position themselves for a rate hike.

    Apart from this, the big worry for the RBI would be the falling rupee. A rise in interest rates may prevent a sharp fall in the rupee, which normally does add to imported inflation.

    If a hike does come through, it would be the first time in four and half years and for the first time under Prime Minister Narendra Modi.

    Clearly, higher than expected CPI inflation data, better than expected GDP numbers, soaring vegetable and milk prices and rising crude could be important factors which may tilt the decision on Wednesday of a rate hike.

    If not June, then most certainly in August a rate hike could be coming. Bond markets, are already factoring a rate hike, just like across the globe. Loans are more expensive today then they were three months back and FDs are yielding higher rates today, then three months back. 

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