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Indian central bank to hike rates again on sticky inflation, Fed pressure - analysts

Published 02/09/2023, 12:54 AM
Updated 02/09/2023, 01:51 AM
© Reuters. A security guard stands next to the logo of the Reserve Bank of India (RBI) inside its headquarters in Mumbai, India, February 8, 2023. REUTERS/Francis Mascarenhas

By Dharamraj Dhutia and Nimesh Vora

MUMBAI (Reuters) - The Reserve Bank of India is likely to raise interest rates once again in April as inflation pressures persist and the Federal Reserve continues to tighten, analysts said on Thursday, a day after the central bank delivered what many had expected to be its last hike in the current cycle.

The RBI raised the repo rate by a widely expected 25 basis points (bps) on Wednesday, in its sixth straight rate hike in a row that took the total to 250 bps in the current fiscal year.

However, the central bank surprised markets by leaving the door open to more tightening, saying the stickiness of core inflation was concerning.

"A more aggressive projection of growth-inflation profile and (policymakers') cautious commentary has led us to add another 25-bps hike in April 2023 to our base case," said Samiran Chakraborty, Citi's chief India economist.

The RBI also kept its policy stance at 'withdrawal of accommodation', rather than shifting to 'neutral'.

"By retaining the stance, the RBI left room open for further tightening. We continue to expect the RBI to hike 25 bps further in the April meeting, on sticky core inflation and a reversal in vegetable prices," said Santanu Sengupta, chief India economist at Goldman Sachs (NYSE:GS).

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

But that is not only due to worries about inflation.

RUPEE PRESSURE

Traders said the rupee's movement and the Fed's rate outlook will also likely influence the RBI.

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

She pointed out that the latest meeting came on the heels of foreign investors pulling $4.4 billion from Indian equities so far this year.

"And even though the rupee has been amongst the more stable Asian currencies in 2022 (as per RBI's analysis in its policy statement), we note that the rupee has underperformed the region in the last few weeks," Bhandari said.

The rupee is currently at 82.62 to the dollar, less than 1% away from the record low of 83.29 it hit last October.

The change in expectations around the Fed rate outlook since the better-than-expected U.S. jobs report on Friday may keep the rupee and other Asian currencies under pressure.

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

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

The continuous increase in Fed funds rate expectations, SBI Research said in a note, has made it a difficult proposition for central banks in emerging economies to take policy decisions.

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