RBI faces rate-hike pressure as inflation rises and growth stays strong

New Delhi : The Reserve Bank of India (RBI) is under growing pressure to raise interest rates as inflation has picked up even while the economy continues to expand at a strong pace.

The RBI’s Monetary Policy Committee began its October meeting on Monday, with the decision due on Wednesday. A Reuters poll found that nearly 60% of economists expect a 25-basis-point increase in the repo rate, taking it from 5.25% to 5.50%. Such a move would be the first rate increase in almost four years. 

The case for higher rates has strengthened in recent months. Retail inflation reached 4.82% in August, moving above the RBI’s 4% target for a third straight month. Price pressures have also become broader, rather than being limited mainly to food and fuel.

At the same time, India’s economy remains relatively strong. GDP growth was 7.8% in the April-June quarter, while bank credit expanded by more than 19% in July. That gives the central bank some room to focus more closely on inflation.

Global developments are adding to the pressure. Several central banks have moved towards tighter monetary policy, while foreign investors have withdrawn substantial money from Indian financial markets this year. A wider interest-rate gap with other major economies could put additional pressure on the rupee.

For borrowers, a rate increase could mean higher costs on fresh loans and, depending on banks' decisions, some existing floating-rate loans. Depositors could benefit if banks raise deposit rates.

The RBI, however, must balance inflation control with the need to avoid unnecessarily weakening economic activity.