The Reserve Bank of India (RBI) may keep monetary policy steady in its April meeting and shift to a hawkish stance by the end of this year to raise interest rates in early 2019 due to inflation pressure, according to a Reuters poll of economists.
61 economists participated in the poll conducted by the news agency between 23 March and 28 March. All of them expected the RBI to hold the repo rate at 6% and the reverse repo rate at 5.75% in its upcoming policy meet, Reuters reported.
The agency in its poll also reported that 60% respondents expected the RBI to change its stance towards policy tightening by year-end. Four of the respondents thought the shift would come as early as its June meeting. Almost a third of respondents forecast the RBI will lift rates by the end of September.
The latest consensus is for the RBI to raise the repo rate and the reverse repo rate by 25 basis points in the first three months of 2019.
“With growth-inflation data likely to be higher after April, we believe there is a risk of more hawkish rhetoric at meetings in June and beyond, including a change in policy stance,” wrote Sonal Varma, Chief India Economist at Nomura.
Despite a slowdown in growth through much of last year, India is on an upswing and reclaimed the top spot as the fastest growing major economy in the final quarter of 2017, outpacing China.
Inflation, on the other hand, has eased slightly, but has been still projected by the central bank above its 4% medium-term target in 2018. “The forecast for inflation suggests that after a temporary decline, which we have already seen, inflation will move slightly higher and this will force a hike,” said Dariusz Kowalczyk, senior economist for ex-Japan Asia at Credit Agricole CIB.
After hitting a low of 1.46% in June 2017, consumer price inflation steadily rose to a 17-month high in December. However, February’s inflation print showed inflation at 4.4%, giving the RBI a breather.
According to the central bank’s own projections, inflation is likely to average 5.1-5.6% for the first half of the 2018-19 fiscal year, before hovering around 4.5% for the remainder of the year.
Against a backdrop of government fiscal slippage, the RBI would focus on “price stability”, higher bond yields and sticky inflation near the upper band of its target, according to Vishnu Varathan, head of economics and strategy at Mizuho Bank.
“The fact that evidence of underlying inflation is picking up... should tilt them towards one rate hike to calibrate policy,” Mizuho’s Varathan said.
If the RBI does raise rates when expected, it would follow other major central banks which are already tightening policy.
The US Federal Reserve raised rates in March and is expected to follow it up with three more hikes this year, according to a separate Reuters poll.