The Reserve Bank of India will raise its main interest rate by 25 basis points on April 6 and then pause for the rest of the year, according to a Reuters poll of economists who said the central bank would still maintain its tightening stance. Inflation in Asia’s third-largest economy remains above the central bank’s upper tolerance limit of 6.00%, reaching 6.52% in January and easing only slightly to 6.44% in February, a key reason for the RBI to hike again.
A strong majority of economists, 49 of 62, said the RBI would lift its repo rate by 25 basis points to a seven-year high of 6.75% at the conclusion of its April 3-6 meeting. A majority of economists in the March 23-28 Reuters poll also said the RBI would then keep the rate steady for the rest of the year.
If realised, that would mark a cumulative 275 basis point increase from the Monetary Policy Committee since last May, a relatively modest rate cycle compared with some other central banks like the U.S. Federal Reserve, which started earlier.
“It’s not just headline – even core inflation, which the MPC did emphasize substantially in the last two policy reviews, continues to be a point of concern for them,” said Vivek Kumar, an economist at QuantEco. “The Fed has done what it roughly telegraphed, and given that backdrop … we see no reason why the RBI should stay back, especially when inflation is running ahead of the upper end of the comfort band.”
A majority of respondents, 20 of 36, said the central bank would maintain its withdrawal of accommodation stance at the April meeting. The remaining 16 said it would shift to neutral.”We expect no change in the stance. There is still a residual expectation of one more Fed rate hike in May. Until that is behind us, the RBI probably will not be very comfortable in signalling that they are done with rate hikes,” said QuantEco’s Kumar.
Of the 33 respondents who answered a separate question, just over half, 18, said the bigger risk to their terminal rate forecast was it would be higher than they predicted, while the remaining 15 said it was that it would be lower.In last month’s poll, all economists said the bigger risk was it would be higher than they predicted.
Seventeen economists who answered another question on how high the rate might go if 6.75% is not the peak gave a median forecast of 7.00%. “With inflation a persistent concern, (the) RBI will likely keep all its options open to deal with the near- and medium-term inflationary risks,” noted Kaushik Das, chief economist, India and South Asia at Deutsche Bank.
The survey showed inflation was expected to average 6.7% in the current fiscal year, and then fall to 5.2% in the next, remaining above the 4.0% medium-term target. The Indian economy was forecast to grow 6.9% this fiscal year and then slow to 6.0% in the next. These estimates were unchanged from the February poll.