Hike rates

With US Fed tightening looming, RBI must normalize policy and raise rates, or risk capital flight abroad

The RBI is expected to follow global indices and raise interest rates, although it is not clear when it will. Some experts expect RBI to take inspiration from the world and act quickly, others say it will wait and watch.

As the US Federal Reserve takes an aggressive stance towards its monetary policy and considers interest rate hikes this year, the Reserve Bank of India will also soon have to consider normalizing its domestic policy, otherwise India could see foreign capital. to go out. The RBI is expected to follow global indices and raise interest rates, although it is not clear when it will. Some experts expect RBI to take inspiration from the world and act quickly, others say it will wait and watch. The US Fed is expected to raise interest rates sooner than expected and start reducing its overall holdings, according to the December Fed meeting minutes released last week.

RBI key rate hike: when and how much

“The general expectation is that once there is an upward movement in domestic interest rates, we would expect four to six rounds of hikes. It could be 100 to 150 basis points. But it actually depends on the evolution of inflation. If foreign inflation, that is to say inflation in the industrial world, becomes very sticky and lasts a long time, you could see an interest rate hike of more than 100 basis points… ”, NR Bhanumurthy , economist and vice-chancellor, Dr BR Ambedkar School of Economics says the university. When asked about when the rate hikes might take place, he said, it is difficult to predict whether the hikes will take place in the calendar year or the fiscal year.

As the RBI decides to raise interest rates, expect the interest rate cycle, which goes up to 100-150bp, Bhanumurthy added. Upasna Bhardwaj, senior economist at Kotak Mahindra Bank, said she expects the RBI to raise the repo rate as early as August and reverse the repo rate between February and April. It forecasts a 50 basis point increase in the reverse repo rate by the end of fiscal 2023, while a 90 basis point increase in the reverse repo rate.

On the other hand, Madhavi Arora, chief economist at Emkay Global Financial Services, said she did not expect the RBI to react aggressively to the Fed’s actions, adding that she expected prices to rise. reverse repo rate but not until April.

India needs aggressive monetary policy normalization, or money will go abroad

It is time for India to be aggressive in its political normalization and follow global signals, Kotak’s Bhardwaj told Financial Express Online. “If India does not act in terms of political normalization, there is clearly a risk of REIT exit, interest rate differentials will tighten and this could cause some financial instability. It is high time, India will have to be much more aggressive in its political normalization and follow global signals, ”she added.

When the US Fed takes a hawkish stance, it has historically been seen to have an impact on emerging markets. If there is a hike in foreign interest rates, there is an expectation that there will be an outflow of foreign capital, said Bhanumurthy, an economist and vice-chancellor. Foreign capital inflows and outflows are determined by interest rate differentials; if the interest rate differential is in favor of foreign currencies, then you would expect them to turn to foreign currencies, and vice versa, Bhanumurthy told Financial Express Online.

Remove lax monetary policy in times of pandemic

Bhardwaj from Kotak said India must respond and withdraw emergency measures related to the pandemic. The excess liquidity that exists in the system and the overnight rates that hover near the lower end of the political corridor also need to be adjusted and accelerated, she added. “The point is where we are today, we see overnight from the minutes of the FOMC that they have become extremely aggressive, and this is the first time that they have spoken of reducing their balance sheet at the middle of the year. This is something that should depend on their feelings and, to that extent, it will also have an impact on Indian asset classes, ”she added.

Emkay’s economist Arora said in a note that the Fed’s action will mean emerging market picking will occur, which will continue albeit on a more stringent basis. Innovation and hard-to-value alternative assets could be at risk, she added.

Really decoupled? Not really

So far, the impact of the omicron variant has been moderate globally and even if there is pressure on the central bank to raise interest rates, the RBI would not consider hike. rate this quarter and she would wait and watch, Arora told Financial Express Online. . It may eventually have to follow suit, but unless there is a major financial disruption in stock or foreign exchange markets, the RBI may only consider a hike in the quarter of April to June. RBI would not be very responsive to the actions of the Fed, she added.

Overall, India will need to have an independent policy based on its own national needs. “We must have our own independent monetary policy. Taking into account national conditions and taking into account foreign economic conditions. Unlike other countries, in post COVID-19 India, monetary policy has become the first line of defense. The reversal of this monetary policy will also have to be done on the basis of our own terms, ”Bhanumurthy said.

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