The Reserve Bank of India (RBI) will raise its main interest rate by 25 basis points on April 6 and then pause for the rest of the year, according to a report by news agency Reuters on Wednesday. According to a Reuters poll of economists, the central bank would still maintain its tightening stance.
India’s inflation still remains above the RBI’s upper tolerance band of 6 per cent, reaching 6.52 per cent in January and easing only slightly to 6.44 per cent in February, a key reason for the central banking regulator to go for another rate hike. A strong majority of economists, 49 of 62, said the RBI would lift its repo rate by 25 basis points to a seven-year high of 6.75 per cent at the conclusion of its April 3-6 meeting.
A majority of economists in the March 23-28 Reuters poll also said the RBI would then keep the rate steady for the rest of the year. If realised, that would mark a cumulative 275 basis point increase from the Monetary Policy Committee since last May, a relatively modest rate cycle compared with some other central banks like the US Federal Reserve, which started earlier.
“It’s not just headline – even core inflation, which the MPC did emphasise substantially in the last two policy reviews, continues to be a point of concern for them,” said Vivek Kumar, an economist at QuantEco.
“The Fed has done what it roughly telegraphed, and given that backdrop … we see no reason why the RBI should stay back, especially when inflation is running ahead of the upper end of the comfort band.”
A majority of respondents, 20 of 36, said the central bank would maintain its withdrawal of accommodation stance at the April meeting. The remaining 16 said it would shift to neutral.
“We expect no change in the stance. There is still a residual expectation of one more Fed rate hike in May. Until that is behind us, the RBI probably will not be very comfortable in signalling that they are done with rate hikes,” said QuantEco’s Kumar.
Of the 33 respondents who answered a separate question, just over half, 18, said the bigger risk to their terminal rate forecast was it would be higher than they predicted, while the remaining 15 said it was that it would be lower.