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RBI may hike interest rate this week, cut MSF rate

New Delhi, Oct 27:

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

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

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

“Our expectation is that the RBI would raise repo rate by 0.25 per cent, 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, the SBI Chief Economic

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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 last month, the RBI Governor, Raghuram Rajan, had surprised markets by increasing repo rate by 0.25 per cent in a bid to check inflation.

Soaring onion prices

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

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 to as high as Rs 100 per kg adding pressure on household expenses.

Earlier this month, the 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.

Focus on inflation, liquidity

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.

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