RBI may hike rates in October despite bond turmoil

TIL Desk/Business/Mumbai/ Even as the bond market is going through some turmoil, the Reserve Bank would still continue with its rate-hiking cycle, say economists. At least a 25 basis points hike can be expected on the October 5 policy, economists said. There could also be a change in stance this time. The consumer price index-based inflation for August was at 3.69 per cent, lower than the RBI’s target of 4 per cent. On Wednesday, the rupee closed at 72.62 a dollar and the 10-year bond yields crossed 8 per cent-mark.

“The larger unattended question is on using monetary policy as a pincer movement: in terms of a more flexible and balanced approach responding systemically to episodes of current financial market volatility and sticking to price stability,” said Soumyakanti Ghosh, chief economist at State Bank of India group.“This would mean a transparent evaluation of the existing policy framework,” Ghosh said.

Under the new monetary policy framework, the RBI is fixated on inflation. It is mandated to keep CPI inflation anchored around the central point of 4 per cent, but with a standard deviation of 2 percentage points on either side. Nevertheless, the RBI’s stance is to keep enough liquidity so that the weighted average call money rates remain around the policy repo rate, which is 6.5 per cent.