INSUBCONTINENT EXCLUSIVE:
A 25 basis point repo rate hike to 6.75 percent would mean a 75 basis point rise since June.The Reserve Bank of India (RBI) is expected to
raise rates for a third time since June on Friday to combat inflationary pressures as it grapples with a weakening rupee, surging oil prices
and market instability sparked by a major non-bank finance firm's defaults.Anticipation of a rate hike has increased in the past month as
oil prices climbed, the rupee's slide accelerated and concerns on liquidity emerged.Rising United States interest rates, capital outflows
from emerging markets and India's weakening balance of payments and current account deficit are also expected to make the central bank
act.A rate hike should make domestic yields on debt more attractive for foreign investors and contain inflationary pressures from high crude
prices as India imports more than two-thirds of its oil needs.The monetary policy committee will hike interest rates by 25 basis points to
battle inflation risks from costly crude oil and the weak rupee as well as "provide assurance about durable liquidity," predicted A
Prasanna, chief economist at ICICI Securities Primary Dealership."You cannot wish away the depreciation in the rupee if you are a current
account deficit country," he said, adding that another reason to hike is so India does not "fall behind the curve in terms of interest rate
differential given that central banks globally are raising interest rates."A 25 basis point repo rate hike to 6.75 percent would mean a 75
basis point rise since June, the steepest increase since the last tightening cycle, between September 2013 and January 2014, when India
faced its worst currency crisis since the 1990s.A Sept
19-25 Reuters poll showed 35 of 64 respondents expect a rate hike on Friday
In a July poll, only 11 of 56 projected the rate to be 6.75 percent by December.While a majority of analysts expect a quarter-point raise,
some analysts said they would not be surprised if there's a 50 bps increase, given surging oil prices and the rupee's battering.The
rupee, which inched towards 74 to the dollar on Thursday, has fallen 13.5 percent in 2018, making it Asia's worst-performing
currency.Emerging market central banks including Indonesia, Argentina, Philippines and Turkey have raised rates to contain inflation
pressures and currency weakness with the United States Federal Reserve set to keep raising rates.MARKETS ON EDGEThe RBI is also expected to
assure markets that adequate funds are available after investors panicked when a series of debt defaults by Infrastructure Leasing
Financial Services (ILFS) led to redemption pressure at other companies in the shadow banking sector.India's inflation rate was 3.69
percent in August and is expected to go above the RBI's projected 5 percent by June 2019 on higher fuel prices, the weak rupee and strong
consumer spending.The 10-year benchmark bond yield has risen by 50 basis points to 8.20 percent since the last policy-making meeting in
August.DBS economist Radhika Rao expects a rate hike, along with the RBI shifting its stance to "hawkish" from "neutral"."For bond markets,
a 25 bps hike accompanied by a hawkish stance could trigger the 10-year bond yield to rise to 8.25 percent," Rao told Reuters after yields
surged on Thursday.BALANCING ACTThe ILFS debt problems have pushed up short-term interest rates sharply with one-year commercial paper
rising by nearly 70 basis points to 9.20 percent since early August, while the one-year treasury bill rate is up 50 bps to 7.73 percent.One
underlying concern is that the RBI's selling of dollars to stem the slide in the rupee has drained 1.5 trillion rupees from the banks
since April.Analysts ruled out chances of a cut in the central bank's cash reserve ratio (CRR) on Friday.To alleviate cash crunch fears,
the RBI has unexpectedly outlined a large bond purchase programme worth 340 billion rupees ($4.61 billion) for October on top of 200 billion
rupees of purchases last month."The RBI is ready to keep real rates high because the policy mandate is to anchor inflation," said Anindya
Banerjee, deputy vice president, currency derivatives at Kotak Securities."The biggest policy anchor for rupee is high real rates
Raising the repo rate will increase the real interest rates and help in attracting fresh foreign inflows which will help in containing the
