RBI may raise repo rate by 25 basis points

NEW DELHI: The Reserve Bank of India (RBI) may opt for a smaller 25-basis-point repo rate hike in December as global economic and domestic financial pressures begin to ease, according to an SBI Research report.

The report revised its earlier forecast of a possible 50-basis-point increase, saying the chances now favour a smaller adjustment. It also assigned a 50 per cent probability to the terminal repo rate settling at 6 per cent or 5.75 per cent.

Consumer Price Index (CPI) inflation rose to 6.09 per cent in October, crossing the RBI’s upper tolerance limit of 6 per cent for the first time under the new series. The report expects inflation to remain above 6 per cent in November before declining.

SBI Research said the RBI had made progress in controlling rupee volatility and easing liquidity pressures.

Improved foreign investment flows and a better global economic outlook are also expected to support the rupee. Foreign institutional investors have invested around USD 7.65 billion since November 6, the report said.

The report expects India’s 10-year government bond yield to remain between 6.75 and 7 per cent, with a downward trend. It said further rate increases in February would not be advisable ahead of the Union Budget.