RBI to raise rates further, narrow majority of economists expect 50 basis point hike

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BENGALURU – The Reserve Bank of India is set to raise interest rates again next week, with a slim majority of economists in a Reuters poll expecting a half-point hike and others expecting a hike. a lower increase of 35 basis points.

There was broad consensus that the RBI will raise rates at the September 30 meeting, although there were differences over how far that would go with inflation accelerating to 7% and the weakening of the rupee.

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The RBI has lagged many of its global peers, despite inflation remaining above the upper end of its 2-6% target range all year. It has raised rates in three separate moves since May, one of them unanticipated, totaling 140 basis points and taking the key repo rate to 5.40%.

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In the latest Reuters poll, economists were split on five points on what the RBI will do at its next meeting.

Just over half, 26 out of 51, said the RBI would opt for a 50 basis point hike, taking the repo rate to 5.90%. 20 others predicted an increase of 35 basis points. The other five respondents forecast more modest increases, ranging from 20 to 30 basis points.

While many revised their forecasts up from an August poll, and no one expected the RBI to leave rates unchanged this time around, there was no immediate explanation as to why. the central bank would opt for a smaller move right now given that most of its peers are getting big. .

The US Federal Reserve just delivered its third straight 75 basis point hike and showed no signs of slowing down, sending the dollar index to a new two-decade high and downward pressure on the rupee.

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« In the case of India, the bloated twin deficits – current account and fiscal – following a stronger dollar are likely to place greater emphasis on macroeconomic stability, despite the visible scars of the pandemic » , said Sajjid Chinoy, chief economist for India at JP. Morgan.

« But a spike in food prices in recent weeks and a hawkish Fed will cause the RBI to move 50bps, from 35bps, at the September meeting, and be forced to act again. in December, bringing the terminal rate closer to 6.25%, 50 basis points higher than the outcome of the global recession that we had envisaged.”

However, the poll showed the RBI taking a softer approach with rates, with no clear majority on where it would stop climbing, but with median forecasts showing the repo rate at 6.00% each quarter until the end of 2023.

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Meanwhile, the rupiah, down nearly 9% this year, hit an all-time low of 80.86/dollar on Wednesday, lower than analysts had predicted in another Reuters poll.

A weaker currency is likely to make imports more expensive and keep inflation high for longer.

The survey also showed that inflation remained above the upper end of the RBI’s tolerance band until the first quarter of 2023.

Although GDP grew by 13.5% in the last quarter compared to a year ago, which made India the fastest growing major economy in the world, the pace of expansion is expected to decrease. halving this quarter to 6.2% and further slowing to 4.4% over the following two quarters.

This may be one of the reasons why the RBI is not keeping pace with other major central banks.

More than 60% of analysts, 23 out of 38 who answered an additional question, said slowing economic growth would play a bigger than normal role in the RBI’s interest rate deliberations. here is the end of this exercise.

Economists were expecting average growth of 6.2% and 6.5% over the next two years, according to the poll.

(For other Reuters Global Economic Poll articles:) (Reporting by Arsh Tushar Mogre; Polling by Anant Chandak, Devayani Sathyan and Veronica Khongwir; Editing by Hari Kishan, Ross Finley and Raju Gopalakrishnan)