NEW DELHI: Watchers of India’s central bank agree that interest rates will be raised to pre-pandemic levels on Friday, yet they will be in the shape of a hike aimed at fighting inflation and propelling a weaker currency. divided on.
Fifteen of 35 economists surveyed by Bloomberg on Thursday morning see the Reserve Bank of India’s six-member Monetary Policy Committee raising the buyback rate by half a point to 5.40%, which was last seen in August 2019. Fourteen of them predicted 35-. With any of these moves seen enough to return borrowing costs to end-2019 levels – for a basis point increase, five quarter-point action and a 40 basis-point increase.
With Federal Reserve officials indicating a standstill, the governor will be closely monitoring the RBI until they see evidence of a moderation in inflation. Shaktikanta DasoAs comments for any guidance on the pace and length of the monetary tightening cycle come as he seeks to ensure a “soft landing” for the economy. The central bank has raised the key rate by 90 basis points since May, including a half-point increase in June.
Here’s what to watch in his commentary from 10am in Mumbai:
inflation forecast
While inflation has been above the RBI’s target of 6% since the beginning of the year, falling commodity prices may provide some scope for the central bank to suggest that the pressure is easing.
“We expect the RBI’s comments to acknowledge that inflation risk is easing,” said Pankaj Pathak, fixed-income fund manager, Quantum Asset Management Company.
Radhika Rao, a senior economist at DBS Bank Ltd. said that inflation in India may be at its peak. “Stable-to-weak commodity prices, in addition to a bullish central bank, are also likely to have a beneficial effect on inflation expectations,” she said.
Still, Rao expects the RBI’s inflation and growth projections for the current fiscal to remain unchanged at 6.7% and 7.2%, respectively. Rainfall deficit in India’s rice-growing regions could cut grain production and complicate the RBI’s fight against inflation.
hike path
Even as the central bank softens on rate hikes, economists see the peak policy rate, or what is commonly referred to as the terminal rate, to be reached earlier in the cycle than expected.
“The RBI is expected to continue the ‘front-loading’ of rate hikes in the forthcoming policy,” said Abhik Barua, Economist, HDFC Bank Ltd.
Barclays plc now sees the policy rate rising to 5.50% by September, up from the earlier forecast for mid-2023. This would indicate that rates have moved into neutral territory, its India-based economist Rahul Bajoria said, referring to a level where rates can help check inflation without affecting economic growth. He put his projection for the terminal rate at 5.75%.
“From a bond market perspective, much of this is already priced in,” said Pathak of Quantum Asset. Benchmark 10-year bonds posted their first monthly gains in July this year and are extending the rally in the policy review. Yields are down about 40 basis points from a three-year high of 7.6% seen in June.
Rupee, Liquidity
While the rupee has hit several lows in recent months, falling below $80 in July, it has pulled back amid signs of a return to foreign fund inflows. Dovish signals from the monetary authority may not sit well with currency traders.
Prasanna Ananthasubramanian, Chief Economist, ICICI Securities Primary Dealership Ltd. said, “The RBI should keep an eye on the interest rate differential with the US, to prevent any build-up of speculative pressure on INR, which is less vested. is born out of reward.” Wrote in a note. “If RBI and MPC take a softer stance, the risk of a sharp depreciation in the rupee increases further.”
The markets will also seek an assurance from the RBI that there is adequate liquidity and that the central bank is ready to implement measures to address any shortfalls.
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