The Reserve Bank of India is likely to raise its key policy rate by another 100 basis points by early next year as the central bank continues to focus on bringing inflation down, Capital Economics said August 5.
“The RBI today raised the repo rate by 50bps to 5.40 percent as we had anticipated, and struck a relatively hawkish tone despite inflation surprising to the downside in recent months,” Shilan Shah, Senior India Economist, said. “It’s clear that the tightening cycle still has legs and we expect another 100bps of hikes by early 2023.”
The house remains comfortable with its view that the repo rate will rise to 6.40% by early 2023 and expects another 50-basis-point hike at the next meeting in late September. The RBI will revert to 25-basis-point hikes after that once inflation has peaked.
Capital Economics already had a hawkish call compared with consensus expectations. Several economists had recently started to scale back their expectations on the so-called terminal repo rate as commodity prices have come off their recent record highs.
Inflation may resume rising for another couple of months due to base effects pushing up food price inflation and firms passing on higher input costs to consumers, Capital Economics said.
India’s retail inflation has stayed above the ceiling of the RBI’s 2 percent to 6 percent target range for several months in a row.
The key price gauge has averaged above 6 percent for two consecutive quarters and is expected to breach the ceiling for another quarter, triggering the condition for the rate-setting panel to explain its failure to the government. The RBI projects retail inflation at 6.7 percent and growth at 7.2 percent for this financial year.