RBI may hike interest rate, MSF rate cut likely

Worsening price situation may prompt the Reserve Bank to raise interest rate by 0.25 percent in its policy review on Tuesday, but it is also likely to announce some liquidity easing steps.

"I think RBI will give support to liquidity by lowering MSF rates or by announcing OMO auctions," Indian Overseas Bank Chairman and Managing Director M Narandra told PTI.

There may or may not be some symbolic announcement on repo rate front, he added.

Also read: How does RBI's interest rate hike impact consumers?

"Our expectation is that RBI would raise repo rate by 0.25 percent, while marginal standing facility (MSF) would be lowered by a similar percentage point," Bank of Baroda Executive Director Ranjan Dhawan told PTI.

A hike in repo rate by 25 basis points is expected on October 29 to anchor inflationary expectations going forward, SBI Chief Economic Adviser Soumya Kanti Ghosh said.

He, however, added that a simultaneous downward calibration of MSF may be required to reduce the cost of borrowing for banks.

In his first policy review, RBI Governor Raghuram Rajan last month had surprised markets by increasing repo rate by 0.25 percent in a bid to check inflation.

High food prices, especially of onion and some other vegetables, pushed up September inflation to seven-month high of 6.46 per cent.

The Wholesale Price Index (WPI) based inflation rose for the fourth month in a row. Inflation was 6.1 per cent in August and 5.85 percent (revised upward from 5.79 percent) in July. In September last year, it was 8.07 percent.

The sharpest increase was in onion prices which jumped by 322.94 per cent in September, over the same month last year.

Onion prices in some of the cities have gone up as high as Rs 100 per kg adding pressure on household expenses.

Earlier this month, RBI had lowered the marginal standing facility (MSF) rate by 0.50 per cent to bring down the cost of fund.

"The apex bank reduced the MSF fund from 9.5 per cent to 9 per cent. The average cost of borrowings of the banks from the LAF window has declined by 40 basis points," Ghosh said.

Deloitte Touche Tohmatsu India Senior Director Anis Chakravaty said the RBI seems to be focusing on the twin objectives of anchoring inflation through the repo mechanism and ensuring adequate liquidity in the system.

The RBI will consider raising rates in the current review to bring inflation under control. It is also likely that the RBI will not hesitate to raise rates till the end of the fiscal cycle if necessary, if it finds consumer prices to be sticky and inflation to persist, he added.