The Reserve Bank of India is set to raise its repo rate in June and raise it at a faster pace than forecasted a few weeks ago as strong inflation pressures the central bank to act faster, a Reuters poll showed.
Retail inflation accelerated to nearly 7% in March, above the 6% upper bound of the central bank’s target range, and is likely to rise further as a spike in global energy prices since Russia’s invasion of Ukraine seeps into consumer prices.
The Monetary Policy Committee (MPC) kept its key rate at an all-time low of 4.0% at its April meeting, despite a shift in focus towards inflation and growth.
But March’s 17-month high inflation rate leaves little room for the RBI other than hiking sooner or later, and all but three economists in an April 20-25 poll by Reuters expected the RBI to lower the repo rate for the first time. would increase since June 2018.
While 42 expected an increase of 25 basis points to 4.25%, only one forecast an increase of 50 basis points.
Just a few weeks ago, less than a quarter of economists – 12 out of 50 – expected the first rate hike to happen in June, and instead the majority predicted the first rate hike in August.
Given the high inflation trajectory and a very realistic chance that the MPC will face its first official ‘failure’ of the monetary policy framework for the first time, the RBI will shift its stance to ‘neutral’ in June and embark on a short-term rate hike cycle,” he said. Rahul Bajoria, India’s chief economist at Barclays.
Further increases were expected in the coming quarters, taking the repo rate to 4.75% and 5.25% by the end of 2022 and the end of 2023, respectively, compared to 4.50% and 5.00% in the previous quarter. previous poll.
If realized, the RBI would be the last to join its peers who have already begun their tightening cycles to contain decades of high inflation, with some even raising interest rates by half a percentage point.
The US Federal Reserve was expected to raise 50 basis points at consecutive meetings in May and June. [ECILT/US]
“The more delay in acting, the more likely you are to end up being more aggressive…there are chances that the RBI will eventually have to do a Fed,” said Kunal Kundu, India economist at Societe Generale.
“Continued inflation has finally turned on its head the temporary theory that central banks around the world seem to have fallen in love with.”
But the RBI was expected to stick with the 25 basis point increases to fight inflation, which is becoming more sticky.
When asked about the odds of a 50 basis point RBI rate hike in June, more than 90% of economists — 28 out of 31 — said it was low or very low. Only three said high or very high.
(Except for the headline, this story has not been edited by DailyExpertNews staff and has been published from a syndicated feed.)