Will the RBI raise rates?

New Delhi: the RBI April 2022 meeting comes at a crucial time – growth was not supported, inflation breaks through the margin of tolerance and the global geopolitical environment adds to these challenges. The RBI surprised most economists by projecting a dovish stance at its last meeting in February, but since then global central banks have been unanimous in their approach to becoming hawkish. The announcement also coincides with the US Federal releasing his minute from the March meeting in which a strongly hawkish stance was projected.

Before we dive into the projections, we try to break down how the economy looking on the eve of the announcement. CPI inflation exceeded the RBI tolerance limit, reaching 6.1% in February 2022 after an already high print of 6% in January, with food inflation reaching 5.9% in February. It also comes at a time when growth has fallen, with GDP growth of 5.4% in Q3FY22. The figure is lower than expected and the fourth quarter figures will also have decreasing base effects. WPI inflation also came in at 13.1% in February after rising to 13% in January, driven by higher crude and commodity prices. IndiaThe current account deficit is also expected to approach the 3% mark, which is significantly higher. Among the macros, we see oil prices rising and the dollar strengthening strongly. We also see US bond yields rising sharply.

As for the policy itself, the majority of economists believe that RBI is likely to leave the reverse repo rate unchanged, with a few expecting a 15 to 40 basis point hike. Most economists believe that RBI will prioritize growth over fighting inflation. Also, most think inflation is high, but RBI can still prioritize growth and consider inflation “under control”. However, they believe that RBI will be forced to re-examine inflation expectations as import price pressures dominate. The RBI is also expected to revise GDP forecasts downward due to the demand squeeze and inflation. Economists also expect comments on how other central banks are fighting inflation and the challenge of balancing growth at a critical time when inflation is rising.

The RBI should, however, prepare the markets for a possible change in policy in the coming months, as inflation remains high.

RBI currently expects FY23 growth to be 7.8%, which may require policy support. In addition, the RBI is expected to revise this forecast downwards. RBI may currently seek to focus on reducing demand compression and establishing a dovish stance may help ease near-term demand as geopolitics take center stage. The RBI has appreciated in the past that different countries are in different phases when it comes to inflation and interest rates and can reiterate this position.