India’s central bank to raise rates again due to sticky inflation, Fed pressure

© Reuters. A security guard stands next to the Reserve Bank of India (RBI) logo inside its headquarters in Mumbai, India, February 8, 2023. REUTERS/Francis Mascarenhas

By Dharamraj Dhutia and Nimesh Vora

MUMBAI (Reuters) – India’s central bank is likely to raise interest rates again in April as inflationary pressures persist and the Federal Reserve continues to tighten, analysts said on Thursday, a day after the central bank made what many expected to be an announcement. its last spike in the current cycle.

The RBI on Wednesday raised the repo rate by an expected 25 basis points (bps), in its sixth straight hike in interest rates taking the total to 250 basis points in the current fiscal year.

However, the central bank surprised markets by leaving the door open to further tightening, saying the firmness of core inflation was a concern.

“A more aggressive projection of the growth and inflation profile and cautious comments (from policymakers) have led us to add another 25 basis point hike in April 2023 to our baseline scenario,” said Samiran Chakraborty, Citi’s chief India economist.

The RBI also maintained its policy stance of ‘pulling back accommodation’, instead of shifting to ‘neutral’.

“By maintaining its stance, the RBI has left room for further tightening. We still expect the RBI to hike further by 25 basis points at the April meeting, on the back of fixed core inflation and a turnaround in vegetable prices,” said Santanu Sengupta, India’s chief economist. at Goldman Sachs (NYSE: ).

ING and QuantanEco Research also now expect the RBI to raise the repo rate in its next policy decision, due on April 6.

But it’s not just because of inflation concerns.


Traders said the movement in the rupee and the Fed’s rate outlook are also likely to weigh on the RBI.

“We think developments on the external front have played an equally important role in the RBI taking a hawkish tone,” Pranjul Bhandari, chief economist for India and Indonesia at HSBC, said in a note.

She noted that the latest meeting came after foreign investors pulled $4.4 billion out of Indian stocks so far this year.

“And while the rupee has been among the more stable Asian currencies in 2022 (as per the RBI’s analysis in its policy statement), we note that the rupee has underperformed in the region over the past few weeks,” Bhandari said.

The rupee currently stands at 82.62 to the dollar, down less than 1% from the all-time low of 83.29 it hit last October.

A change in expectations on the Fed’s rate outlook from Friday’s better-than-expected US jobs report could keep the rupee and other Asian currencies under pressure.

Investors now expect a 25 bps rate hike at each of the next two Fed meetings. There were even doubts about one before the jobs report.

The continued increase in the Fed funds rate, SBI Research said in a note, makes it difficult for central banks in emerging economies to make policy decisions.

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