Hike rates

RBI to hike rates in June, with faster tightening trajectory likely if inflation surges: report

RBI to raise repo rate in June, ahead of schedule: Reuters poll

BENGALERU:

The Reserve Bank of India will raise its repo rate in June and rise at a faster pace than expected just weeks ago as a spike in inflation pushes the central bank to act faster, according to a Reuters poll.

Retail price inflation accelerated to almost 7% in March, above the upper 6% limit of the central bank’s target range, and is expected to rise further as prices soar. global energy prices since Russia’s invasion of Ukraine is seeping into consumer prices.

The Monetary Policy Committee (MPC) kept its key rate at a historic low of 4.0% at its April meeting despite shifting its focus to inflation rather than growth.

But the 17-month high inflation figure in March leaves little room for the RBI other than to rise sooner rather than later, and all but three of 46 economists in a Reuters poll from April 20-25 expected that the RBI raises the repo rate for the first time since 2018 in June.

While 42 expected a 25 basis point hike to 4.25%, only one expected a 50 basis point hike.

Just a few weeks ago, less than a quarter of economists – 12 out of 50 – expected the first rate hike to come in June, with the majority expecting the first rate hike in August instead.

“Given the high inflation path and a very realistic chance that the MPC will face its first official ‘failure’ of the monetary policy framework, the RBI will shift to ‘neutral’ in June and embark on a cycle short of rate hikes,” said Rahul Bajoria, chief India economist at Barclays.

Further increases are expected to follow 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, from 4.50% and 5.00% in the survey previous.

If realized, the RBI would be the latest to join its peers who have already begun their tightening cycles to rein in decades-high inflation, with a few even raising rates by half a percentage point.

The US Federal Reserve was expected to hike 50 basis points in successive meetings in May and June. [ECILT/US]

“The longer you wait to act, the more aggressive you are likely to become…there’s a chance that the RBI will end up doing a Fed,” said Kunal Kundu, Indian economist at Societe Generale.

“Persistent inflation finally upended the transitional theory that central banks around the world seemed to have fallen in love with.”

But the RBI had to stick to 25 basis point hikes to fight inflation which is getting stickier.

Asked about the chances 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 title, this story has not been edited by NDTV staff and is published from a syndicated feed.)