August 12, 2022
Reserve Bank of India

RBI will raise the repo rate in June, sooner than expected, according to a poll.

According to a poll, the Reserve Bank of India will raise its repo rate in June, and at a faster rate than forecast just a few weeks ago, as rising inflation puts pressure on the central bank to move sooner.

Retail inflation increased to nearly 7% in March, exceeding the central bank’s goal range of 6%, and is expected to rise higher as a surge in global oil prices since Russia’s invasion of Ukraine penetrates consumer pricing.

Despite moving its focus from growth to inflation, the Monetary Policy Committee (MPC) retained its reference rate at a record low 4.0 percent in April.

However, the RBI’s 17-month high inflation statistic leaves no choice but to hike sooner rather than later, and all but three analysts polled by Reuters between April 20 and 25 expected the RBI to raise the repo rate for the first time since 2018 in June.

Only one projected a 50 basis point hike, while 42 predicted a 25 basis point hike to 4.25 percent.

Just a few weeks ago, only around a quarter of economists (12 out of 50) predicted the first rate hike in June, with the majority, expecting an increase in August.

“Given the elevated inflation trajectory and a very realistic chance of the MPC facing its first official “failure” of the monetary policy framework, the RBI will shift its stance to “neutral” in June and embark on a short rate hiking cycle,” said Rahul Bajoria, chief India economist at Barclays.

More hikes are projected in the coming quarters, bringing the repo rate to 4.75 percent and 5.25 percent, respectively, by the end of 2022 and 2023, compared to 4.50 percent and 5.00 percent in the previous poll.

If realized, the RBI would be the next in a long line of central banks to begin tightening cycles to combat multi-decade high inflation, with some boosting rates by half a percentage point.

The Federal Reserve of the United States was projected to raise rates by 50 basis points at two sessions in May and June.

“The more delay in acting, the greater the possibility you might end up being more aggressive…there are chances the RBI might have to eventually do a Fed,” said India economist at Societe Generale, Kunal Kundu.

“Persistent inflation has finally upended the transitory theory that central banks across the world had seemed to have fallen in love with.”

However, the RBI was expected to limit hikes to 25 basis points to combat rising inflation.

When asked if a 50 basis point RBI rate hike in June was likely, over 90% of economists – 28 of 31 – thought it was unlikely. Only three people said “very high” or “extremely high.”

 

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