Economists Expect More Aggressive Rate Hikes From RBI To Tame Inflation

RBI has increased the repo rate by 40 bps to 4.40% in its first rate hike in nearly four years.

New Delhi:

India’s central bank is expected to hike interest rates more aggressively in its effort to tame high inflation, economists said on Wednesday after the long-awaited rate hike, at least until its repo rate stood at 5.15% before. -Covid level is not reached.

Most economists are now forecasting rate hikes by a cumulative 125-150 basis points over the next 12 months, compared with 50 basis points projected three months ago, on the grounds that inflation will be around 7% for at least three months more. can stay. Increase in global energy, food and manufacturing prices.

The Reserve Bank of India’s Monetary Policy Committee (MPC) raised the benchmark repo rate – the rate at which it lends to banks – in its first rate hike in nearly four years by 40 basis points to 4.40%, while raising the banks’ cash reserve ratio. Extended. An increase of 50 basis points to raise approximately $11.4 billion in surplus liquidity from the market.

“We believe the rate hike is a late acceptance of inflationary risks and that the policy has been behind the curve,” Nomura Chief Economist Sonal Verma said in a note to clients.

Nomura expects retail inflation to remain 6.6% year-on-year in the fiscal year that began in April and raised its forecast for the key interest rate by December to 5.75% and 6.25% from its earlier estimate of 5% Have given. The second quarter of 2023, up from the previous 6%.

This has led to an increase of 35 basis points in the RBI’s MPC meeting in June, followed by a 50 basis-point increase in August and 25 basis-points in the next April meetings.

Many private economists said that unlike some other central banks, the RBI had been in denial for some time, ignoring inflationary pressures that pushed retail inflation closer to 7% in March, with indications that it would Could remain above the tolerance band of the central bank for two quarters.

Inflation has risen to several-year highs in most countries, driven by a rebound in economic activity and massive supply chain disruptions in the wake of Russia’s invasion of Ukraine, forcing many central banks to raise benchmark rates. Is kept.

India’s wholesale price index rose to 14.55% in March, suggesting that companies were passing on higher costs for energy, electricity duty and other input materials, putting pressure on retail prices.

Shilan Shah, an economist at Singapore-based Capital Economist, said the move by the RBI would slow down the pace of rising prices. He now expects the repo rate to rise to 5.65% this year, which was higher than his earlier expectation of 5%.

Industry leaders and bankers warned that higher benchmark interest rates would raise the cost of borrowing for companies and consumers – reducing GDP growth by 25 basis points this fiscal year, while the cost of borrowing for federal and state governments will increase.

“Our current growth forecast of 7.4-7.5% is likely to go down by 25 basis points due to higher borrowing costs to spur demand,” said Dipanvita Majumdar, economist at state-run Bank of Baroda.

Majumdar expects another growth of 50-70 basis points in the current fiscal.

Some economists said the government needed to cut taxes on petrol and diesel – highest among major economies – to ease inflationary pressures as it was making things expensive for everyone.

(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)


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