RBI set to hike rates 25bps on high inflation, stay hawkish

By Swati Bhat

MUMBAI (Reuters) – India’s central bank is expected to raise its benchmark rate for the seventh consecutive meeting on Thursday, leaving the door open for more hikes to return inflation to its target range, economists said.

A large majority of economists, 49 out of 62, said the Reserve Bank of India (RBI) would raise its repo rate by 25 basis points to a seven-year high of 6.75% at the conclusion of its meeting. three days on April 6. The central bank has already raised rates by 250 basis points since May last year.

“The need for another rate hike is driven by the elevated level of core inflation that has been hovering near or above 6% since mid-2021,” said Gaura Sen Gupta, an economist at IDFC FIRST Bank.

Retail inflation rose 6.44% yoy in February, up from 6.52% in January, but has remained above the central bank’s mandatory target range of 2-6% in 10 of the last 12 readings.

Core inflation, which excludes the volatile food and energy components, was also expected to remain high at between 6.05% and 6.12% in February, according to estimates by three economists.

Unseasonal rains could keep food prices high, and a surprise move by OPEC and its allies to cut production recently has also pushed up oil prices, potentially adding to imported inflation.

“Policy space to focus on inflation is provided by domestic growth conditions, supported by urban consumption and the recovery of the service sector,” Sen Gupta said.

India’s manufacturing sector expanded at its fastest pace in three months in March, while service industry growth slowed slightly from a 12-year high in February, surveys of private companies by S&P Global showed.

However, some economists said signs of turmoil in the US and European banking sectors could lead to tighter financial conditions and a steeper global slowdown. The first signs of a slowdown in India are also visible in easing imports and stagnant demand for bank credit.

“Risk management considerations mean MPC will go on hiatus in April,” said A Prasanna, head of research at ICICI Securities Primary Dealership. The committee will retain its option to move up later by keeping its phrase “withdrawal of accommodation,” she said, essentially holding on to its adjustment bias.

The Reuters poll showed that the majority of respondents, 20 out of 36, expected the central bank to maintain its “withdrawal of accommodation” stance, while the remaining 16 said it would switch to neutral.

The liquidity of the banking system has improved in recent days after having been in deficit at the end of March. The liquidity surplus stood at 2.11 trillion rupees on Wednesday, its highest level since September 5 and more than double the surplus of 1.04 trillion rupees from the previous session.

However, after the first days of April, liquidity is expected to tighten again as the government begins its borrowing program and increases the extraction of credit from banks.

“While the central bank could intervene to unfreeze conditions through ad hoc variable repo operations, the preference will be to keep the net liquidity balance close to a mild or non-inflationary neutral deficit, with relief expected through of government spending or a likely return in portfolio inflows,” said Radhika Rao, a senior economist at DBS Group Research.

(Reporting by Swati Bhat; Editing by Shri Navaratnam)