© Reuters. A security guard stands next to the Reserve Bank of India (RBI) logo inside its headquarters in Mumbai, India, February 8, 2023. REUTERS/Francis Mascarenhas
By Dharamraj Dhutia and Nimesh Vora
MUMBAI (Reuters) – The Reserve Bank of India is likely to raise interest rates once more in April as inflationary pressures persist and the Federal Reserve continues to tighten, analysts said on Thursday, a day after the central bank delivered what many expected would be its last hike in the current cycle.
The RBI raised the repo rate by a widely expected 25 basis points (bps) on Wednesday, in its sixth consecutive rate hike that brought the total to 250 bps in the current fiscal year.
However, the central bank surprised markets by leaving the door open for further tightening, saying core inflation stickiness was worrying.
“A more aggressive projection of the growth-inflation profile and cautious comments (from policymakers) have led us to add another 25bp increase in April 2023 to our base case,” said Samiran Chakraborty, chief economist at Citi. in India.
The RBI also maintained its policy stance at ‘accommodation withdrawal’, rather than changing to ‘neutral’.
“By staying stanced, the RBI left room for further tightening. We continue to expect the RBI to rise a further 25bp at the April meeting, due to persistent core inflation and a reversal in vegetable prices,” Santanu said. Sengupta, India’s chief economist. at Goldman Sachs (NYSE:).
ING and QuantanEco Research now also expect the RBI to raise the repo rate in their next policy decision, which is due on April 6.
But that’s not just because of inflation concerns.
RUPEE PRESSURE
Traders said the rupee’s move and the Fed’s rate outlook are likely to influence the RBI as well.
“We believe developments on the external front played an equally important role in the RBI taking a hawkish tone,” Pranjul Bhandari, HSBC’s chief India and Indonesia economist, said in a note.
He noted that the latest meeting came on the heels of foreign investors pulling $4.4bn out of Indian stocks so far this year.
“And while the rupee has been among the most stable Asian currencies in 2022 (according to RBI analysis in its policy statement), we note that the rupee has underperformed the region in recent weeks,” Bhandari said.
The rupee is currently at 82.62 to the dollar, less than 1% from the record low of 83.29 it reached last October.
The change in expectations around the Fed rate outlook since Friday’s better-than-expected US jobs report may keep the rupee and other Asian currencies under pressure.
Investors now expect a 25bp rate hike at each of the next two Fed meetings. There were doubts about even one before the jobs report.
The continued rise in federal funds rate expectations, SBI Research said in a note, has made it a difficult proposition for central banks in emerging economies to make policy decisions.