INDIA MULLS SECOND CONSECUTIVE HIKE
RBI may take more decisive steps to rein in inflation and stem capital outflows
INDIA’S central bank is on course to raise interest rates for a second consecutive policy meeting as it takes more decisive steps to rein in inflation and stem capital outflows.
With inflation running well above the central bank’s medium-term target of four per cent pressure is building on the Reserve Bank of India (RBI) to act.
Bond investors are already taking shelter in shorter-term debt amid concern this could be the start of a tightening cycle.
“It’s a great time for the RBI to hike rates because people are worried about inflation and growth numbers are looking good,” said R. Sivakumar, head of fixed income at Axis Asset Management, which oversees about US$11.5 billion (RM46.7 billion) in assets.
“By December, if growth falls off, then hiking in December or later will get more difficult.”
Bond investors and economists in Bloomberg surveys predict the RBI will hike by 25 basis points, taking the repurchase rate to 6.5 per cent on Wednesday.
Many of them are also watching if the monetary policy committee (MPC) will shift to a hawkish stance, a move that would spell more pain for the bond market.
A rate move will take the benchmark to a two-year high, following June’s 25 basis-point hike. Like central banks from Turkey to Indonesia, the RBI has been propelled into action amid an emerging-market rout triggered by rising US interest rates and a stronger dollar.
Domestic inflation worries are mounting: the economy is rebounding, government prices for some food crops have been raised, and fuel costs are rising.
The yield on benchmark 10year bonds has surged 45 basis points this year, rising above eight per cent last month for the first time in three years.
Short-term yields have risen in anticipation of policy tightening in the near term, with money managers including Kotak Mahindra Asset Management Co buying debt maturing in less than five years.