RBI Set For Aggressive Rate Hikes After Clear Hawkish Minutes: Economists

The Reserve Bank of India is expected to aggressively tighten policy in the next meeting after minutes of its off-cycle policy review earlier this month revealed that rate setters pitched for front loading hikes amid a worsening inflation outlook.

Economists at Nomura Holdings Inc., Barclays Plc and Deutsche Bank AG forecast the RBI to raise rates by as much as 50 basis points when it meets June 6-8. Citigroup Inc. said the minutes reveal a “clear hawkish commitment” by the central bank to bring back inflation closer to its 2-6% target band.

“The minutes confirm our view that policy is behind the curve and has to significantly catchup via front-loaded rate hikes,” Nomura economists Sonal Varma and Aurodeep Nandi wrote in a note Wednesday, raising their forecast for a June increase to 50 basis points from 35 basis points.

Inflationary pressures, worsened by war-induced supply-chain disruptions, pushed up prices of commodities including food, fuel and fertilizers. Retail inflation rose to an eight-year high in April, while wholesale prices for the same month hit the fastest in three decades.

Deutsche Bank economist Kaushik Das said there was a “high risk” that inflation would remain above 7% for the rest of the fiscal 2022-23 and that may push the RBI to hike rates by 50 basis points in June and 25 basis points in August.

The RBI minutes released Wednesday showed monetary policymakers called for a reversal of the pandemic-era accommodations during the meeting. External member Jayanth Rama Varma favored more than a 100 basis points rate increase to be “carried out very soon,” while Ashima Goyal wanted rate hikes to be front-loaded.

“We see a clear focus on reaching pre-pandemic monetary conditions, which we expect to happen by the August MPC,” said Rahul Bajoria, an economist with Barclays in Mumbai.

Swaps are pricing in a 60 basis points increase in June, followed by another 50 basis points and 60 basis points in the next two meetings, according to Naveen Singh, head of trading at ICICI Securities Primary Dealership Ltd.