According to a Reuters poll of economists, the Reserve Bank of India will postpone its first interest rate hike for at least four months, to August at the earliest. The central bank should now be concerned about inflation, according to economists.
So far this year, inflation has risen above the RBI’s upper limit of 6%, casting doubt on the current strategy of keeping inflation low to support growth, despite the fact that some central banks have raised borrowing costs during this cycle.
The RBI did not deliver what was expected to be a small increase in its repo rate at its most recent policy meeting in February, setting the stage for raising the repo rate, the main policy tool, from 4.0 percent, where it has been for almost two years.
Only six of the fifty people polled between March 29 and April 5 predicted that repo levels would remain unchanged on Friday. By the end of June, 32 rates are expected to remain unchanged.
In the third quarter, twenty-five economists predicted repo rates would rise by 25 basis points to 4.25 percent, while 15 predicted rates would rise to 4.50 percent or higher. The Reserve Bank of India meets to set policy in early August and late September, indicating that a rate hike is at least four months away.
In a February poll, 28 of 41 respondents predicted that by the end of June, at least one interest rate increase would have occurred. “The main reason for deferring our repo (rate) hike until Q3 is the RBI’s adamant defence of its accommodative stance, which views inflation primarily as a threat,” said an economist Dhiraj Nim to Reuters.
“Unless the expected rise in core inflation does not materialise and inflation eases, I don’t see any reason for another delay.” It’s highly unlikely, given current oil prices. Inflation should be given more weight in the RBI’s policy evaluations.”
While the RBI’s dovish stance suits most of its Asian counterparts, it is trailing major central banks such as the US Federal Reserve and the Bank of England in combating global inflation.
When asked if the RBI’s Monetary Policy Committee should now focus on inflation rather than growth, 23 out of 37 respondents said yes, while the remaining 14 said no.
If the MPC ever acts, I believe the very dovish members will need something about inflation reality checks. “It’ll probably take some surprisingly higher inflation figures for them to pay more attention,” said Miguel Chanco, Pantheon Macroeconomics’ chief economist for emerging Asia.
Inflation is expected to have peaked at 6.1 percent last quarter, but will remain above the Reserve Bank of India’s medium-term target of 4.0 percent until at least 2024. Inflation forecasts were all higher than they were in the previous macroeconomic poll in January.
In contrast, economic growth slowed to 8.7% in the previous fiscal year and 7.5 percent in the current one, down from 9.2% and 8.0 percent, respectively. This follows a period of slow growth in the fourth quarter of 2021.