Expectations Of A 50-Basis-Point RBI Rate Hike Grow After 7% Inflation Print
The RBI’s Monetary Policy Committee is scheduled to meet between Sept. 28 and 30.
The clamour for a 50 basis-point rate hike by the Reserve Bank of India has begun after India’s retail inflation touched 7% in August.
The inflation print was a tad higher than economists’ estimates. It’s also the eighth straight month of breach of the Reserve Bank of India’s upper target of 6%.
The RBI’s Monetary Policy Committee is scheduled to meet between Sept. 28 and 30.
Core Inflationary Pressures Persist
Upside and downside risks are expected to balance each other, according to a note by QuantEco Research, which continues to maintain FY23 CPI inflation forecast of 6.5%.
“The monthly peak for CPI inflation is behind us at 7.79% in April,” it said. “The headline trajectory is expected to moderate toward about 6% levels in Q3 FY23 and further toward about 5.5% levels in Q4 FY23.”
From the monetary policy perspective, there is a likelihood of actual CPI inflation undershooting the RBI’s estimates by 20-40 basis points over Q2-Q4 FY23 (CPI inflation was 20 bps lower than the RBI’s forecast in Q1 FY23). This offers marginal comfort and could offer modest downside risk to the RBI’s FY23 CPI inflation projection of 6.7%, it said.
“Nevertheless, amid persistence of core inflation at elevated levels, we continue to expect 50 basis points cumulative rate hike from the RBI before it pauses to assess the impact of past actions,” economists at QuantEco said. With key central banks once again upping their ante in the fight against inflation, it is likely that the MPC would deliver the anticipated tightening in a front-loaded manner between September and December 2022 policy reviews, it said.
Upside Risks To Outlook Persist
The RBI is also expected to continue with another round of rate hike, Dipanwita Mazumdar and Sonal Badhan, economists at Bank of Baroda, said in a note. They expect an addition of 50 bps rate hike in the current cycle. “This will further quell inflationary pressure and anchor inflation expectation.”
They forecast headline CPI inflation at 6.5% for FY23, with risks remaining on the upside.
Terminal Rate Likely At 6%
The rise in August CPI inflation was largely in line with market expectations. The sequential momentum, too, rose a tad, by 0.3% month-on-month on a seasonally adjusted basis compared to a contraction of 0.6% in July, Pranjul Bhandari, chief economist at HSBC, said.
“We expect rate hikes in the two remaining meetings of the year, taking the repo rate to 6% by December.” The RBI has spoken about real neutral rates at about 1% and has forecasted inflation at 5% in April-June 2023 quarter. “Combining the two, we think the repo rate can be raised to 6%,” Bhandari said.
BofA Securities economists Aastha Gudwani and Mohamed Faiz Nagutha said a sub-7% CPI inflation print would have offered the RBI MPC some comfort to consider a more measured hike on Sept. 30.
While the August CPI inflation outturn doesn’t pose any upside risks to the full-year CPI inflation trajectory, it doesn’t offer much comfort either, they said.
On the other hand, activity indicators seem to be losing momentum as highlighted by the IIP data. This naturally deepens the dilemma for the RBI MPC. “Our U.S. and Euro area economists have recently upped their upcoming and terminal rate estimates and that makes the next move by the RBI MPC a rather close call between a 25 and 35 basis points hike,” they said.
CPI Inflation To Inch Higher In September
With mandi prices hinting at a further uptick, inflation in September is estimated at 7.14%, according to Madhavi Arora, lead economist at Emkay.
“While the RBI is still far from its supposed neutral rate, we are near the peak of the RBI’s hawkishness, led by falling risk premia of the entire commodity price complex,” she said. The global situation, however, is still fluid and macro assessments might still require frequent adjustments ahead from a policy perspective.
“We are closely watching the global pace of inflation deceleration and how the impending recession will shape developing market central bank policies,” Arora said.
This will potentially have implications for the RBI. FY23 could see the RBI’s policy rates terminating around 5.75% (+10/15 basis points), with the central bank showing its intent to keep real rates near the estimated natural rate. The break-up of the remainder rate hike could be frontloaded or split for the rest of calendar year 2022.