India Inflation: With inflation now a priority, RBI likely to hike rates in June

With inflationary pressures building up steadily and retail inflation coming in at a 17-month high in March, analysts now expect the Reserve Bank of India (RBI) to start hiking repo rates in June, earlier than forecasts made a few weeks ago.

In its April 8 meet, the RBI prioritised curbing inflation over supporting growth even while keeping the repo rate unchanged. Research firm Nomura in a note said that the minutes of the Monetary Policy Committee‘s (MPC) meeting confirm that India is at the cusp of a policy normalisation cycle, and that a 25bp rate hike in June policy meeting is likely.

“At this stage, the RBI appears focused on removing the ultra-accommodation in place, with a gradual 25 bps moves, although we believe a faster 50 bps hike in the subsequent meetings (August/October) should not be ruled out,” it said.

Further, a Reuters poll has shown that the RBI will raise its repo rate in June and hike at a faster pace than predicted just a few weeks ago. While 42 expected a 25 basis point hike to 4.25%, only one predicted a 50 basis point hike.

All but three of 46 economists in an April 20-25 Reuters poll expected the RBI to raise the repo rate for the first time since 2018 in June.

In its April 8 meeting, the RBI had unanimously opted to change its policy stance from remaining accommodative “
as long as necessary to revive and sustain growth on a durable basis” to remaining accommodative “
while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth”.

Goldman Sachs said in a note that this change in stance in their view is a two-step policy towards moving to a more neutral stance by the June policy. Teresa John, economist at Nirmal Bang too expects a change in RBI’s stance to ‘neutral’ with the possibility of a rate hike in June 2022.

However, MPC member Jayanth R. Varma, in the minutes of the meet, argued that in today’s ‘extremely uncertain’ situation, it is very important for the MPC not to issue any forward guidance that would tie its hands.

Data shows that in the recent months, the pick-up in food inflation contributed the most to headline inflation, with inflation of cereals, vegetables, spices, and protein-based food items like eggs, meat, and fish being the key drivers. Owing to the Russia-Ukraine war, supply chain disruptions, and more recently, the palm oil export ban by Indonesia, consumers’ pockets are bound to take a hit in the coming weeks.

“Given the elevated inflation trajectory and a very realistic chance of the MPC facing its first official “failure” of the monetary policy framework, the RBI will shift its stance to “neutral” in June and embark on a short rate hiking cycle,” said Rahul Bajoria, chief India economist at Barclays told Reuters.

More hikes were expected to follow in the coming quarters, taking the repo rate to 4.75% and 5.25% by end-2022 and end-2023 respectively, compared with 4.50% and 5.00% in the previous poll.