Experts on monetary policy agree that the Reserve Bank of India (RBI) will raise interest rates to pre-pandemic levels on Friday, the Bloomberg reported on Thursday. The news agency said that the analysts are, however, split on the size of the hike aimed at taming inflation and propping up a weak rupee.
According to a survey by Bloomberg, sixteen of 36 economists see the RBI’s six-member monetary policy committee (MPC) lifting the repurchase rate by half-point to 5.40 per cent, a level last seen in August 2019. Fourteen of them predict a 35-basis point hike, five a quarter-point action, while one for a 40 basis-point hike, with any of these moves seen enough to return borrowing cost to late 2019 levels.
With the US Federal Reserve officials signalling a pause is out of the question until they see evidence of inflation easing, RBI watchers will be closely monitoring Governor Shaktikanta Das’s remarks for any guidance on the pace and length of the monetary tightening cycle as he seeks to ensure a “soft landing” for the economy.
Since May, the RBI has hiked the key rate by 90 basis points, including a half-point hike in June.
The report pointed out while inflation has stayed above the RBI’s target band of 6 per cent since the beginning of the year, falling commodity prices may provide some scope for the central bank to suggest that pressures are easing.
Pankaj Pathak, a fixed-income fund manager at Quantum Asset Management firm, “We expect the RBI’s commentary to soften a bit with an acknowledgment that inflation risks are receding.”
Inflation may have peaked in India, said Radhika Rao, a senior economist at DBS Bank Ltd. “Stable-to-weaker commodity prices, besides a hawkish central bank, are also likely to have a salutary impact on inflationary expectations,” she said.
Still, Rao expects RBI’s inflation and growth projections to stay unchanged at 6.7 per cent and 7.2 per cent, respectively, for the current fiscal year. Lack of rainfall in parts of India’s rice producing regions may cut production of the grain and complicate the RBI’s inflation battle.
Even if the central bank goes soft on rate hikes, economists see the peak policy rate, or what’s usually referred to as the terminal rate, to be reached earlier than expected in the cycle.
“The RBI is expected to continue with ‘front-loading’ of its rate hikes at the upcoming policy,” said HDFC Bank Ltd. economist Abheek Barua.
While the rupee has hit a series of lows recently, dropping past 80 to a dollar in July, it has pulled back amid signs of returning foreign fund inflows. Dovish signals from the monetary authority may not sit well with the currency traders.
“RBI should keep a tab on interest rate differentials with the US to curb any build-up of speculative pressures on the INR, triggered by low implied yields that reduces the cost of shorting rupee,” ICICI Securities Primary Dealership Ltd. chief economist Prasanna Ananthasubramanian wrote in a note. “If RBI and MPC adopt a dovish posture, the risk of sharper declines in rupee grows more prominent.”
The markets will also seek assurances from the RBI that there’s ample liquidity and that the central bank is ready to implement measures to address any tightness.
The RBI should keep its focus on prices and not worry about rupee’s weakness which is at a “pretty level,” Raghuram Rajan, former governor of the RBI, said in an interview to Bloomberg. “If you focus on getting inflation under control, the exchange rate finds the appropriate level,” he added.