The Monetary Policy Committee (MPC) may decide on hiking interest rates this week, as the rupee constantly continues to be under pressure, and threats to inflation continue.
The RBI will deliver its verdict on Oct 5, in which economists are almost certain that there would be a 25 basis points hike. The hike, if it comes through, would be the third hike this year.
What's likely to tilt the decision in favour of a hike is that the rupee and crude oil are moving in opposite directions. While the rupee is falling, crude oil is gaining momentum and this is cleary a double whammy.
As we write crude oil has hit a 4-year high, while the rupee at 72.81 to the dollar, is very close to a new lifetime high. In fact, in the coming days, it might even breach levels of 73. This may put pressure on the RBI to hike rates and pull down the rupee.
What is most important would be the forward looking statements from the RBI on inflation expectations that would set the tone for the markets. In all probability we would see the RBI maintaining a hawkish stance.
The increase in Minimum Support Price (MSP) is also unlikely to play on the minds of policy makers, who are likely to believe that this could lead to further inflation pressures.
Loans might get costlier
We might see interest rates on home loans, auto loans, personal loans and gold loans going up. Interest rates on deposits might also trend higher, and that is already being witnessed. It should not be long before government owned banks start offering interest rates of 8 per cent on fixed deposits.
Already NBFCs with a AAA rating on their deposits are offering an interest rate of near 8.72 per cent annually.
It is likely that there maybe one more hike coming, following the Oct hike (looks certain) in FY 2018-19. Borrowers are likely to feel the pinch and there is no denying it.
It would be also interesting to see what kind of liquidity support the RBI offers to the system. One cannot completely rule out a cut in the Cash Reserve ration (CRR) to infuse fresh liquidity into the banking system, which is grappling with poor liquidity.
The RBI is also likely to use the Open Market Operations (OMO) tool to infuse fresh liquidity into the system. Analysts are also going to wait for the RBI to address the measures it is taking with regards to the I&LFS fiasco.
All in all, it is not going to be a tricky policy this time round. It is pretty much a straight forward policy, where the RBI is likely to hike rates.
However, the markets would be pleasantly surprised if the RBI would keep interest rates on hold. At the moment that seems a remote possibility. So brace for higher interest rates in the coming days. It might just be the time to avoid investing in fixed interest bearing securities with a long duration, as you maybe trapped with lower interest rates. Look for investments with a 1 year duration or shorter.