RBI Could Hike Rates By A Further 25-35 Basis Points, Says Ila Patnaik
RBI must deal with domestic inflation and also watch action by the U.S. Fed, so a rate increase is on the cards, says Ila Patnaik
India’s Reserve Bank of India must plan its policy rates not just based on the trajectory of domestic inflation, but also based on decisions made by the U.S. Federal Reserve, according to Ila Patnaik of Aditya Birla Group.
Though inflation has cooled in India, the central bank will still have to raise interest rates by 25-35 basis points, she said.
“There are two reasons to hike rates—one is domestic inflation and the second is U.S. rate hikes, so that there is no adverse pressure on the rupee. For those two reasons, I see rates going up a little…,” Patnaik, who is also the chief economist, told BQ Prime on the sidelines of the Law, Economics and Policy Conference organised by the Institute of New Economic Thinking at FLAME University in Pune.
In the U.S., Patnaik said, the Fed will continue to act aggressively to curb inflation that has entrenched on account of actions taken during the Covid-19 pandemic. Fiscal transfers by the U.S. government served to create substantial demand.
“…the U.S. Fed has to increase rates, with some expecting it to go up to 4.75-5.00%. And if that happens, then, considering that the RBI worries a lot about the rupee and it does keep trying to peg the rupee to the U.S. dollar, it might feel under pressure to hike rates here in India as well,” Patnaik said.
The U.S. Fed, Patnaik said, has already made the mistake of being behind the curve once. The Fed had said in public that it thought the inflation that emerged in the aftermath of the pandemic was transitory.
“I would think that even if they don’t go down to 2% (inflation), unless they come down to at least 3%, they (Fed) are not going to start easing rates," she said. "They are not going to turn to the economy and the slowdown because their mandate is more on inflation control, which they’ve been behind the curve on."
Despite the global headwinds, India’s growth story remains intact, according to Patnaik. In the recent past, data has pointed to a pick-up in private credit and there are also signs of investment improving. So, despite a likely dampener on the export front, India’s domestic economy remains robust.