Economists expect higher rate hikes after RBIs hike to tame inflation

div classBodysc17zpet90 cdBBJodivpBy Manoj Kumar and Aftab Ahmedp

pNEW DELHI Reuters – Indias central bank is expected to frontload more aggressive interest rate hikes in its effort to tame high inflation, at least until its repo rate hits its preCOVID level of 5.15, economists said after a longanticipated rate hike on Wednesday.pdivdivdiv classBodysc17zpet90 cdBBJodiv

pMost economists are now forecasting a cumulative 125150 basis points of rate hikes over the next 12 months, compared with about 50 basis points expected three months ago, on the grounds that inflation could remain around 7 for at least three months more due to soaring global energy, food, and manufacturing prices.p

pThe Reserve Bank of India‘s Monetary Policy Committee MPC raised the benchmark repo rate – the rate at which it lends to banks – by 40 basis points to 4.40 in its first rate hike in nearly four years, while raising banks’ cash reserve ratio by 50 basis points to mop up about 11.4 billion in surplus liquidity from the market.p

p“We believe the rate hike is a belated acknowledgement of the inflation risks and that policy has been behind the curve,” Sonal Varma, chief economist at Nomura, wrote in a note to clients.p

pNomura expects retail inflation to remain at 6.6 yearonyear in the fiscal year that began in April and has raised its forecast for the main interest rate to 5.75 by December from its earlier projection of 5, and to 6.25 by the second quarter of 2023, up from a previous 6.p

pIt has pencilled in a rate hike of 35 basis points at the RBIs MPC meeting in June followed by a 50 basispoint hike in August and 25 basispoint moves at the following meetings until next April.p

pMany private economists said that unlike some other central banks the RBI had remained in denial for some time, ignoring inflationary pressures that pushed retail inflation to near 7 in March, with indications that it could remain above the central banks tolerance band for two quarters.p

pInflation in most countries has soared to multiyear highs, driven by a rebound in economic activity and a further straining of rampant supply chain disruptions in the wake of Russias invasion of Ukraine, forcing many central banks to raise benchmark rates.p

pIndias wholesale price index rose to 14.55 in March, suggesting companies were increasingly passing on high costs for energy, power tariffs and other input materials, putting pressure on retail prices.p

pShilan Shah, economist at Singaporebased Capital Economist, said the RBIs move will slow down the pace of rising prices. He now expects the repo rate to rise to 5.65 this year, up from his earlier expectation of 5.p

pIndustry leaders and bankers warned that higher benchmark interest rates would raise borrowing costs for companies and consumers – reducing GDP growth by 25 basis points this fiscal year, while increasing costs for federal and state governments borrowings.p

p“Our current growth forecast of 7.47.5 is likely to go down by further 25 basis points on account of the higher borrowing cost to curtail demand,” said Dipanwita Mazumdar, economist at staterun lender Bank of Baroda. p

pMazumdar expects another rate hike of 5070 basis points in the current fiscal year. p

pSome economists said the government needs to cut taxes on petrol and diesel – the highest among the major economies – to dampen inflationary pressures as it was making things costlier for everyone.p

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pp Editing by Hugh Lawsonp

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