Analysts predicted on Thursday that the Reserve Bank of India will raise interest rates again in April if inflationary pressures remain high and the Federal Reserve continues to tighten monetary policy, one day after the central bank announced what many thought was the final rate hike of the current cycle.
The RBI increased the repo rate by a widely anticipated 25 basis points (bps) on Wednesday. This was the sixth consecutive rate increase, bringing the total for the current fiscal year to 250 bps.
However, the central bank shocked the markets by indicating that further tightening was possible and that the stickiness of core inflation was alarming.
Samiran Chakraborty, chief economist for India at Citi, stated that “a more aggressive estimate of the growth-inflation profile and (policymakers’) cautious comments have prompted us to add another 25 bps in April 2023 to our base case.”
Related: The policy committee of the Indian central bank meets to review the country’s first missed inflation target.
Along with maintaining its strategy of “removing accommodation,” the RBI refrained from adopting a “neutral” attitude.
“The RBI left the door open for additional tightening by maintaining the position. “On account of persistent core inflation and a decline in vegetable prices, we still anticipate the RBI raising interest rates by 25 basis points in April,” according to Santanu Sengupta, chief economist for India at Goldman Sachs (NYSE:GS).
Additionally, ING and QuantanEco Research anticipate the RBI to raise the repo rate at its upcoming policy announcement on April 6.
But it isn’t only a result of inflation concerns.
Pressure on the rupee
Traders said that the RBI will likely also be impacted by the volatility of the rupee and the Fed’s rate forecast.
Pranjul Bhandari, head economist for India and Indonesia at HSBC, wrote in a note that “we think the events on the external front had an equally major impact on RBI adopting a hawkish tone.”
She emphasised that the most recent meeting took place just after foreign investors withdrew $4.4 billion from Indian stocks so far this year.
Despite being one of the more stable Asian currencies in 2022 (according to the RBI’s analysis in its policy statement), Bhandari said that the rupee has recently lagged the area.
The rupee is now trading at 82.62 to the dollar, less than 1% above its October 2017 record low of 83.29.
The rupee and other Asian currencies may continue to be under pressure due to the shift in expectations surrounding the Fed rate outlook following the better-than-expected U.S. employment data on Friday.
Investors currently anticipate two 25-bps rate increases in the Fed’s next two sessions. Before the employment report, there were questions about even one.
SBI Research noted in a report that the ongoing rise in Fed Funds rate expectations has made it challenging for central banks in developing countries to make policy decisions.