RBI to hike rates again on steady inflation, Fed pressure: Analysts

 

MUMBAI: The Reserve Bank of India is likely to hike interest rates once again in April as inflationary pressures persist and the Federal Reserve continues to tighten, analysts said on Thursday, with the central bank expected to make its last hike. In the current cycle, a day after

The RBI on Wednesday raised the repo rate by a widely expected 25 basis points (bps), in the sixth straight rate hike in a row, taking the total hike to 250 bps in the current fiscal.

However, the central bank left markets open to further tightening, saying the stability of core inflation remained a concern.

"A more aggressive projection of the growth-inflation profile and cautious commentary (from policymakers) have us pushing for another 25-bps hike in April 2023," said Samiran Chakraborty, India chief economist at Citi.

RBI kept its policy stance on 'withdrawal accommodation' instead of moving to 'neutral'.

Retaining the stance, RBI has left room for further tightening, said Santanu Sengupta, chief economist for India. We expect RBI to hike another 25 bps in the April meeting, which will address sticky core inflation and vegetable prices. There's a reversal." at Goldman Sachs.

ING and QuantanEco Research also now expect the RBI to hike the repo rate in its next policy decision on April 6.

But this is not only because of concern about inflation.

rupee pressure

Traders say that rupee volatility and Fed's rate outlook can also affect RBI.

"We find that developments on the external front have played an equally important role in the RBI's accommodative stance," Pranjul Bhandari, chief economist for India and Indonesia at HSBC, said in a note.

The latest meeting comes after foreign investors pulled out $4.4 billion from Indian equities so far this year, he said.

"And even though the rupee has been among the more stable Asian currencies in 2022 (as per analysis in RBI's policy statement), we note that the rupee has underperformed in the region over the past few weeks," Bhandari said.

The rupee currently stands at 82.62 against the dollar, down 1% from its record low of 83.29 last October.

A change in expectations around the Fed rate outlook after a better-than-expected US jobs report on Friday could keep the rupee and other Asian currencies under pressure.

Investors now expect a 25-bps rate hike at each of the Fed's next two meetings. Even before the Jobs report, there was doubt about one.

SBI Research said in a note that persistent rise in fed funds rate expectations has made it difficult for central banks in emerging economies to take policy decisions.