Sharper, bigger RBI moves coming in December? SBI economists put things in perspective

The Reserve Bank of India may step up monetary tightening in December amid pressures from rising inflation and a more and more volatile global environment, PTI reported citing economists at State Bank of India (SBI) on October 7.

SBI economists said they expected the central bank to raise the benchmark repo rate by 50 basis points at its next monetary policy review, taking it to 6% from the current 5.50%.

The projection follows the RBI's 25-basis-point increase in repo rate to 5.50% on Wednesday, its first such hike in nearly four years. The central bank also shifted its policy stance to "calibrated tightening", a combination SBI described as a decisive policy signal.


The bank's economists said rising inflation could necessitate a bigger increase at the December review, while noting that the rate decision would also depend on global conditions.

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They said they expected global markets and economic conditions to become more volatile in the coming days, adding that taking the repo rate to 6% would be the preferable course.

Before Wednesday's policy announcement, several economists and market watchers had also anticipated two 25-basis-point rate increases, including one at the December review.

SBI also called for a clear policy framework on artificial intelligence, arguing that greater clarity could facilitate capital flows and support the rupee.

The bank said policy guardrails were needed as the currency moves towards what it described as a worrying benchmark. The rupee weakened 43 paise against the US dollar on Wednesday to close at 96.78.

SBI proposed several measures to support the currency, including a graded structure for long-term capital gains tax with the rate minimised beyond a reasonable holding period of three years and above.

It also recommended widening the effective interest rate corridor by decisively increasing the Marginal Standing Facility (MSF) rate, even if the measure is implemented for a shorter period.

The bank further suggested that the RBI continue with liquidity management measures.

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The recommendations come as the central bank manages inflation risks alongside pressure on the rupee and capital flows. A 50-basis-point increase in December would mark a sharper pace of tightening than Wednesday's move, if inflation and global conditions take the expected road.