Goldman Sachs expects RBI to hike policy rates by 25 bps in Jan-Mar 2019; here are two key reasons

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Updated: October 8, 2018 4:10:14 PM

On Friday, the RBI kept the repo rate unchanged at 6.5%, spooking the market, which had widely expected an increase of 25 basis points in policy rates.

Goldman Sachs, David Solomon, Wall Street bank, Donald Trump, white house, Guggenheim PartnersGoldman Sachs has also revised its inflation forecasts for the financial year 2019 to 5.2% as against 5.3% earlier. (Reuters)

Goldman Sachs Research expects that the Reserve Bank of India (RBI) is likely to raise policy rates by 25 basis points each in the first quarter of 2019, primarily on account of depreciation in rupee and rising inflation. The central bank is also expected to raise policy rates by 25 bps each in the second, third and fourth quarter of 2019.

The global financial services company has also revised its inflation forecasts for the financial year 2019 to 5.2% as against 5.3% earlier, saying that there is likely to be continued upward pressure on core inflation, the PTI reported citing a Goldman Sachs report on Monday.

“We continue to believe that the RBI is underestimating the rise in headline inflation, especially given their updated assumptions on oil, INR, and MSP,” Goldman Sachs said in a research note.

On Friday, the central bank kept the repo rate unchanged at 6.5%, spooking the market, which had widely expected an increase of 25 basis points in policy rates. While the RBI decided to maintain the status quo, it also turned hawkish and ruled out any further cut in rates in future by changing stance from ‘Neutral’ to ‘Calibrated Tightening’.

Soon after the RBI’s decision to keep policy rates unchanged, the rupee breached 74-mark for the first time ever in intra-day trade, before paring some losses. On the other side, Sensex closed almost 800 points down. The central bank had hiked interest rate by 25 basis points each in June and August, citing upward pressure on inflation and volatility in crude oil prices.

Meanwhile, on Monday, the domestic currency hit the 74/$ mark again during afternoon trade session on Monday, touching an intra-day low of 74.0150 against the US dollar, Bloomberg data showed.

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