As US begins rate hikes, RBI needs to move on normalisation path: Morgan Stanley's Chetan Ahya

The Reserve Bank of India (RBI) needs to move on the policy normalisation path as its US counterpart, the Federal Reserve, begins to hike key rates, Chetan Ahya of Morgan Stanley said in an interview to CNBC-TV18. The economist's remarks come days after the RBI held the key interest rates on hold and decided to continue with its 'accommodative' stance of monetary policy, amid concerns over the Omicron variant of COVID-19.

However, Ahya, Chief Asia Economist at Morgan Stanley, expects India's monetary policy to remain 'accommodative'. He expects the effective policy rate to increase by 150 basis points in 2022.

On Wednesday, the Federal Reserve announced it would end its COVID-19-era bond purchases in March and pave the way for three quarter-percentage-point interest rate hikes by the end of 2022. "The economy no longer needs increasing amounts of policy support," Fed Chair Jerome Powell said.

“The most important indicator that the Fed mentioned in the dot plot which markets took note of is the revision in the inflation forecast; of course, they added more rate hikes in the dot plots in 2022 and 2023, but the more interesting point is that it raised that inflation forecast for 2022 to 2.7 (percent) from 2.3. If you look at the break-even inflation expectations priced in the bond market, they moved up by 5.5 basis points and correspondingly, the 10-year real rates actually declined and now they are at about 100 basis points,” he said.

Ahya doesn't see undue pressure on the Indian rupee.

“At this point of time, the situation is still in control and we do not see undue pressures on Indian currency because of that. But going forward, as the US begins taking up actual rate hikes and India's recovery takes further hold, we do think the RBI needs to move on to normalisation path," he said.

He also said other macroeconomic stability indicators in Asia are "in pretty good shape".

However, others are not so optimistic about the rupee.

Standard Chartered Bank's Steve Englander expects the dollar to remain firm in the near term. He sees the rupee at the 77.5 level against the greenback.

Englander, Global Head-G10 Forex Research and North America Strategy at Standard Chartered Bank, expects the RBI to increase key rates next year.

“He (Fed Chair) did everything that the market expected him to do. And indeed the policy stance was more hawkish than what they had in September and even what they implied in November,” he said.

The market went too far in anticipating the hawkishness of the US central bank, he said.

“I think what the market took away is that it was a very calm response to inflation, no tearing the hair out but kind of saying, we (the markets) can deal with this and inflation will come down,” Englander added.