RBI’s Dovish Inflation View Pushes Back India Tightening Calls


Economists are pushing back estimates for when India will raise interest rates after Governor Shaktikanta Das lowered inflation and growth forecasts, betting that the central bank can stay focused on spurring economic activity.

Citigroup Inc. sees the Reserve Bank of India lifting the repurchase rate no earlier than October, versus its earlier August prediction. HSBC Holdings Plc shifted to July-September from April-June, and Barclays Plc moved to August from April.

The firms are, however, split on whether such a delay is risky. While Citigroup warns that the RBI may fall behind the curve, HSBC says the nation’s promising winter harvest keeps it relatively insulated from global food price pressures.

The shift follows the monetary authority’s surprise last week with an ultra-dovish policy, highlighting a relaxed attitude in the face of inflation pressures and an expected U.S. tightening.

RBI’s Dovish Inflation View Pushes Back India Tightening Calls
Source: Bloomberg

Of particular interest was Das’s indication that any change in the reverse repo rate, which had been expected, would first require an overall shift from the RBI’s accommodative stance.

That’s a sea change from 2013, when the taper tantrum forced India and others to follow the Federal Reserve. Indonesia and Thailand have also recently kept their benchmark interest rates at record lows, while the Philippines is expected to follow suit Thursday.

India’s policy makers say this time is different. Unlike 2013, when there was a paucity of dollars, the RBI is now sitting on a huge pile of foreign exchange reserves — among the world’s top five at $630 billion and counting — along with a low current account deficit.

They are also convinced that factors driving U.S. and European inflation, such as used cars and scarcity of truck drivers, won’t spill over into India.

‘Different’ Inflation

“The whole character of inflation is very different,” Michael D. Patra, deputy governor in charge of monetary policy, said earlier this month. “So, we have to respond to an entirely different inflation evolution.”

Patra said he predicts inflation will ease toward 4.5% after September — a far cry from January’s 6.01% print, which breached the RBI’s 4%-6% target range. Meanwhile, policy makers see India’s Covid-hit economy still in need of further support.

“The RBI has clearly signaled that their policy tightening path will depend more on domestic economic conditions than global rate actions and spillovers,” said Saugata Bhattacharya, chief economist at Axis Bank Ltd. in Mumbai.

For now, economists say the RBI will continue to soak up liquidity as it takes baby steps toward normalization.

“We maintain our call for the repo to be adjusted in the second half of 2022 with risks of being deferred as Governor Das emphasized that any upcoming change in direction will be ‘well-telegraphed’,” said Radhika Rao, senior economist at DBS Bank in Singapore. (Bloomberg)