Reserve Bank Likely To Wait Till August To Raise Repo Rate, Says Report

So far this year, inflation has held above the RBI’s prescribed 6 per cent upper threshold. Some central banks are already raising borrowing costs in this cycle

According to the poll report, all but six of 50 respondents polled March 29-April 5 forecast no repo rate change on Friday's MPC meet. Image: Getty

New Delhi: The Reserve Bank of India (RBI) may delay its first interest rate hike by at least four months to August at the earliest.

According to a report by Reuters, the new agency through its economists poll mentioned that the central bank must now start worrying about higher rate of inflation.

So far this year, inflation has held above the RBI’s prescribed 6 per cent upper threshold. Some central banks are already raising borrowing costs in this cycle.

According to the report, the RBI, at its last policy meeting in February, did not deliver what was expected to be a small rise in its reverse repo rate to set the stage for lifting the repo rate, the main policy tool, from 4.0 per cent where it has been for nearly two years.

The poll report stated that all but six of 50 respondents polled March 29-April 5 forecast no repo rate change on Friday. While 32 two expected rates to still be unchanged by end-June.

Twenty five forecast the repo rate to climb by 25 basis points to 4.25 per cent in the third quarter, while 15 saw rates rising to 4.50 per cent or higher.

The RBI will meet in both early August and late September to set policy, meaning a rate rise is at least four months away.

Inflation was expected to have peaked at 6.1 per cent last quarter but is forecast to remain above the RBI’s 4.0 per cent medium-term target until at least 2024.

All median forecasts for inflation were higher than in a previous macroeconomic poll in January.

In a February poll, 28 of 41 respondents expected at least one rate hike by end-June.

Dhiraj Nim, economist at ANZ,  said, “The key reason for pushing out our repo (rate) hike to Q3 is the RBI's staunch defence of its accommodative stance, viewing inflation largely as a supply-side issue that will pass. I don't see a reason for another delay unless the expected rise in core inflation doesn't materialise and inflation eases. With oil prices where they are, that is extremely unlikely. The RBI should start giving more weight to inflation in their policy assessment.”

While its dovish stance matches most of its Asian peers, the RBI is well behind major central banks like the US Federal Reserve and the Bank of England in tackling the latest surge in global inflation.

Asked whether the RBI’s Monetary Policy Committee (MPC) should now shift its focus to inflation from growth, 23 of 37 respondents said it should, while the remaining 14 said it should not.

“I think the extremely dovish members of the MPC need something of a reality check on inflation if they are ever to act. It will probably take some upward shocking inflation numbers for them to pay more attention,” said Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics.

Economic growth, on the other hand, was downgraded to 8.7 per cent for the previous financial year and 7.5 per cent for the current one, from 9.2 per cent and 8.0 per cent, respectively. This comes after lacklustre growth in the final quarter of 2021.

Twenty-six of 35 economists saw a low or very low chance of the Indian economy entering stagflation, a prolonged period of high inflation and low growth, in the next two years.

However, RBI Governor Shaktikanta Das recently dismissed this as a risk. The remaining nine respondents said there was a high chance of stagflation.

“The conflict in Europe brings risks of higher inflation and slower growth. From a macroeconomic standpoint, India's policymakers have experienced a narrowing of their policy options in the last few weeks," noted Rahul Bajoria, chief India economist at Barclays.