India’s central bank to raise rates due to rising inflation
2023.02.13 02:33
India’s central bank to raise rates due to rising inflation
By Tiffany Smith
Budrigannews.com – Analysts said on Thursday that the Reserve Bank of India is likely to raise interest rates once more in April because inflation pressures are still high and the Federal Reserve is still tightening things up. This comes a day after the central bank did what many people had expected to be its last rate increase in this cycle.
On Wednesday, the Reserve Bank of India (RBI) increased the repo rate by 25 basis points (bps), which brought the total for the current fiscal year to 250 bps. This was the sixth rate increase in a row and was widely anticipated.
However, the central bank surprised the market by saying that the stickiness of core inflation was troubling and that it was open to further tightening.
Citi’s chief India economist, Samiran Chakraborty, stated, “A more aggressive projection of growth-inflation profile and (policymakers’) cautious commentary has led us to add another 25 bps hike in April 2023 to our base case.”
Additionally, rather than changing its policy stance to “neutral,” the RBI remained at “withdrawal of accommodation.”
“The RBI left room for additional tightening by maintaining the stance. Santanu Sengupta, chief India economist at Goldman Sachs (NYSE:), stated, “We continue to expect the RBI to hike 25 bps further in the April meeting, on sticky core inflation and a reversal in vegetable prices.”
Both ING and QuantanEco Research now anticipate that the RBI will raise the repo rate at its upcoming April 6 policy decision.
However, this is not just because of concerns about inflation.
According to traders, the RBI will likely be affected by the rupee’s movement and the Fed’s outlook on interest rates.
In a note, HSBC’s chief India and Indonesia economist Pranjul Bhandari stated, “We think the developments on the external front played an equally important role in RBI taking a hawkish tone.”
She said that the most recent meeting happened after foreign investors pulled $4.4 billion out of Indian stocks so far this year.
According to Bhandari, “And even though the rupee has been among the more stable Asian currencies in 2022 (according to RBI’s analysis in its policy statement), we note that the rupee has underperformed the region in the last few weeks.”
The rupee is currently trading at 82.62 to the dollar, which is less than 1 percent above the record low it reached in October of 83.29.
Since Friday’s better-than-expected U.S. jobs report, expectations for the Fed’s rate outlook have changed. This could keep the rupee and other Asian currencies under pressure.
Now, investors anticipate a 25-bps rate increase at the Fed’s next two meetings. Before the jobs report, even one was in doubt.
SBI Research stated in a note that central banks in emerging economies are finding it difficult to make policy decisions due to the persistent rise in Fed funds rate expectations.
