Economists pencil in rate hikes from June
MUMBAI/NEW DELHI: With inflation galloping to a 17-month high, economists now expect the Reserve Bank of India (RBI) to begin rate hikes in June, as the central bank’s options to tame prices without choking growth narrow.
Retail inflation accelerated to 6.95% in March, driven by a surge in food inflation and high fuel prices. Economists are worried that inflation is becoming more broad-based, contrary to RBI governor Shaktikanta Das’s earlier view that high inflation was transitory. But the surge in global energy prices because of the Ukraine crisis prompted RBI to strike a hawkish tone in the policy meeting in April when it signalled that it would start unwinding the ultra-loose monetary policy. Economists expect RBI to hike the repo rate by at least 25 basis points in June. One basis point is 0.01%.
“With the inflation outturn materially to the upside and momentum still rising, we are lifting our terminal repo rate forecast to 6% by the third quarter of 2023, with a 25bp rate hike in each of the next eight MPC meetings (200bp in cumulative repo rate hikes by Q3 2023 vs 150bp earlier). We see a rising risk that rate hikes could be even more frontloaded, with a 50bp hike in one of the meetings in 2022, given that monetary policy often works with a long lag,” Nomura said in a note.
RBI has held rates at a record low of 4% to foster growth after the pandemic-induced lockdowns hit growth. The economy contracted a revised 6.6% in FY21, its worst performance in more than 40 years. Economists have also raised their inflation forecasts to 6.6% in FY23. RBI, which had pegged retail inflation at 4.5% next fiscal, revised its estimate to 5.7% during the last policy.
Auto firms are already feeling the pressure, with domestic sales of two-wheelers and passenger vehicles falling in March from a year ago. Car companies have also increased prices.