RBI Expected to Raise Rates After Nearly Four Years

The Reserve Bank of India (RBI) is expected to raise interest rates for the first time in nearly four years on Wednesday, driven by rising inflation and a weakening rupee. Of the 40 economists surveyed by Bloomberg, 34 anticipate a quarter-point increase to 5.50%, while the rest predict no change. The Monetary Policy Committee is likely to maintain a neutral stance, keeping options open for future adjustments.

Since the last policy meeting in August, inflation has worsened, oil prices have climbed above $100 a barrel, the U.S. Federal Reserve has tightened policy, and the rupee has weakened significantly. The RBI has intervened to support the currency, leading to a record decline in foreign exchange reserves. Economists predict further rate hikes, with Gaura Sen Gupta of IDFC First Bank forecasting a total of 75 basis points by February to prevent negative real policy rates.

The conflict in the Middle East and a weak monsoon threaten to push inflation higher, with crude oil costs impacting an economy heavily reliant on imported energy. While bond markets are pricing in tighter policy, some economists argue that core inflation remains stable, providing room for continued growth support. The RBI’s decision will also address excess liquidity in the banking system, stemming from foreign-currency deposits attracted earlier this year.

Investors will watch for clues on the pace of future rate increases and the broader economic outlook. The NSE Nifty 50 has experienced its longest losing streak in 25 years due to foreign investor withdrawals, high oil prices, and a weaker rupee. The RBI’s measures to absorb surplus liquidity, including bond sales and currency swaps, will also be closely monitored.