The Reserve Bank of India is expected to keep the repo rate unchanged this week despite rising inflation and pressure on

The Reserve Bank of India (RBI) is widely expected to keep interest rates unchanged at its monetary policy meeting this week, even as several global central banks shift towards rate hikes amid higher oil prices and renewed inflation concerns.

The Monetary Policy Committee (MPC) is expected to leave rates unchanged on Wednesday, with 68 of 72 economists surveyed by Reuters forecasting a status quo decision. While the central bank could adopt a more hawkish tone, expectations are that it will retain flexibility as domestic inflation remains manageable.

The RBI’s expected pause would put India on a different monetary policy path from several economies that have tightened policy following the escalation of geopolitical tensions in the Middle East.

Central banks in Europe, Australia, Indonesia, the Philippines, Singapore, South Korea and South Africa have raised benchmark borrowing costs over the past five months. The US Federal Reserve and the Bank of Japan, meanwhile, have kept rates unchanged.

Inflation rises but remains within RBI’s tolerance band

India’s retail inflation accelerated to 4.38 per cent in June, moving above the RBI’s 4 per cent target for the first time in 17 months. However, inflation remains within the central bank’s tolerance band of 2-6 per cent.

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Core inflation, which excludes volatile food and fuel prices, has remained contained at around 4 per cent, giving policymakers room to keep rates unchanged for now.

The impact of higher fuel prices on broader inflation has also remained relatively limited so far. However, signs of price pressures are beginning to emerge.

Inflation expectations have risen, while wholesale inflation climbed to 9.87 per cent in June. Persistent wholesale price pressures could eventually feed into consumer inflation and reduce the RBI’s room to maintain its current policy position.

Markets price in rate hikes over next 12 months

While expectations overwhelmingly favour a pause this week, financial markets are increasingly betting that the RBI will eventually have to tighten monetary policy.

Interest-rate swap markets are pricing in roughly 75 basis points of rate hikes over the next 12 months, reflecting expectations that inflation and currency pressures could eventually push the central bank towards tightening.

The rupee remains another major concern for policymakers.

Its slide to a record low ahead of the RBI’s June policy meeting had triggered calls for higher rates to support the currency, particularly as some other emerging-market central banks moved to tighten policy.

Instead of raising rates, the RBI announced measures aimed at attracting foreign capital, including scrapping capital-gains tax for foreign holders of Indian government bonds and making dollar deposit schemes for non-resident Indians more attractive.

The measures attracted nearly $40 billion in inflows and initially helped the rupee recover. However, renewed hostilities in the Gulf and the resulting rise in oil prices have once again put pressure on the Indian currency.

How long can RBI stay on hold?

The debate is increasingly shifting from whether the RBI will raise rates this week to how long it can maintain its current policy stance.

Higher interest rates could widen India’s rate differential with major economies, potentially increasing the attractiveness of Indian assets to foreign investors and providing support to the rupee.

For now, relatively contained consumer inflation gives the RBI room to remain on hold. But rising wholesale prices, higher inflation expectations, elevated crude oil prices and continued pressure on the rupee could gradually narrow that room.