India's central bank is likely to raise its benchmark interest rate as the domestic currency continues to depreciate hitting fresh record lows against the dollar almost every day recently, amid rising oil prices and capital outflows.
The six-member Monetary Policy Committee of the Reserve Bank of India is widely expected to lift the repo rate by a quarter-point to 6.75 percent from the current 6.50 percent.
The fourth bi-monthly monetary policy statement for the fiscal year 2018-19 is due at 5.00 am ET on Friday.
Taking into account inflationary expectations, the bank had raised the benchmark rate at the previous two meetings, by 25 basis points each.
Any central bank in the world will want to be pre-emptive rather than reactive to future inflation expectations and in India's case, expectations remain elevated, Prakash Sakpal, an ING economist, said.
"We won't be surprised if the RBI does hike more than 25bp this Friday, though our baseline remains only a 25bp now and another like move in the next meeting in December," the economist added.
Although inflation eased to 3.69 percent in August, rising global oil prices and the currency weakness are set to weigh notably on consumer prices.
The bank had projected 4.8 percent inflation for the second half of 2018-19.
The interest rate hikes by the U.S. Federal Reserve have triggered capital outflows from emerging markets, making their currencies highly volatile.
In September, the Philippines and Indonesia had resorted to massive 150 bps rate hike in response to currency weakness.
In India, the rupee weakness coupled with higher prices of oil, which is one of India's major imported commodity, worsened the current account position.
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