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RBI to Raise Rates Again in June but Not Clear by How Much: Poll

by Economy India
May 16, 2022
Reading Time: 3 mins read
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SHARESHARESHARESHARE

BENGALURU: The Reserve Bank of India will follow its surprise May rate rise with another hike at its meeting next month, according to a majority of analysts polled by Reuters who were exceptionally split on the size of the move.

India’s retail inflation accelerated to an eight-year high in April, remaining above the central bank’s tolerance limit for a fourth month in a row, and is likely to stay elevated.

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The sudden change in views on surging inflation and how to tame it means the RBI will likely take the repo rate, currently at 4.40%, back to at least its pre-pandemic level next quarter and not in 2023 as previously thought.

In the latest Reuters poll, over a quarter of economists, 14 of 53, expected the RBI to hike by 35 basis points to 4.75% next month, while 20 expected a larger move ranging from 40-75 basis points, including ten who forecast a 50 basis point hike.

Twelve respondents forecast a modest rate rise (10 to 25 basis points) while seven saw no move at the June 6-8 meeting.

At the meeting, the RBI is likely to also raise its inflation projection for the current fiscal year and will consider more interest rates, a source aware of the developments told Reuters.

However, such an exceptional splintering of views on how the RBI will follow up on its unscheduled 40 basis point move on May 4 shows the challenge facing forecasters who were completely taken off guard and not given clear guidance on what comes next.

“We need to really see the second action…in June to really get a grip of exactly what is the scale of policy normalisation that we can expect and the pace as well,” said Upasna Bhardwaj, senior economist at Kotak Mahindra Bank, who is predicting a 35 basis point rise to 4.75%, the median forecast for June.

But she added that “markets are clear on one account, that there is going to be aggressive policy rate hikes because inflation is the biggest threat at this point in time.”

That aggressive outlook in part reflects what other central banks were forecast to do, especially the U.S. Federal Reserve, which was expected to hike rates by 50 basis points at its upcoming meetings after a similar move earlier this month.

Nearly one-third of respondents, 17 of 53, forecast the repo rate at 5.15% next quarter, back to where it was before the pandemic. Another 20 predicted rates to go even higher.

More interest rate rises were on the way, with rates reaching 5.40% or higher by end-2022.

Respondents from a much smaller sample who had forecasts going to the end of next year, 11 of 15, saw the repo rate hitting 5.75% or higher.

Further, the chances of the RBI joining some of its peers in hiking 50 basis points appears stronger now than before.

Just over half of respondents to an additional question, 22 of 41, saw a high or very high chance of a 50 basis point RBI rate hike at the next meeting, while the rest saw a low or very low chance. That was an abrupt change from a survey taken last month, where the majority saw those chances as low.

“​Communications out of the RBI could have been a lot better…this kind of surprise move certainly does not help with policy credibility,” said Tuuli McCully, head of Asia-Pacific economics at Scotiabank.

“I see their reasoning why they felt like they couldn’t wait any longer and had to act, but it certainly is an issue… if they say something and then act the other way then, it doesn’t help with the communication.”

Still, when asked what the RBI’s surprise repo rate hike did for its credibility, more than two-thirds of respondents, 24 of 34, said improved while the rest said worsened or did nothing.

Tags: Reserve Bank of India (RBI)
Economy India

Economy India

Economy India is one of the largest media on the Indian economy. It provides updates on economy, business and corporates and allied affairs of the Indian economy. It features news, views, interviews, articles on various subject matters related to the economy and business world.

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