Analysts at Rabobank point out that the RBI will meet today to decide on interest rates and they think it will be a tough call as there are several arguments in favour of a hold on rates.
Key Quotes
“Firstly, the free fall of the INR seems to have grinded to a halt. USD/INR is now trading at 67.1, a full figure below the mid-May peak of 68.4. Secondly, both Saudi Arabia and Russia have signaled that they have plans to gradually step up oil production levels ‘in the near future’, which has prevented Brent from breaking through the USD 80/bbl barrier.”
“However, the arguments in favour of a hike outweigh those in favour of keeping the status quo. Although inflationary pressures due to higher oil prices are seemingly a one-off, large net oil importers such as India run the risk that this type of cost-push inflation will be anchored in structurally higher inflation expectations, which could result in unfavourable wage-price dynamics. In February we already wrote about building inflationary pressures, but given the recent series of events (i.e. a surge in oil price, sliding INR, capital outflows) inflation could take off to even more elevated levels in the near term.”
“Moreover, the tightening cycle in the US isn’t over yet and our view is that there are two more US hikes in the pipeline for this year (N.B. Earlier this week, RBI Governor Patel urged the Fed to slow its plans to shrink the balance sheet – and they have only just started!). Lastly, even though only 14 out of 44 economists are expecting a rate hike, forward rates suggest that a 25 bps move is already for c. 80% priced in. We are pretty convinced that the RBI’s decision is not 100% exogenous and Governor Patel and his fellow MPC members want to surprise nor spook the market. To conclude: we expect that the RBI will raise the repo rate from 6.00% to 6.25% and the reverse repo rate from 5.75% to 6.00%.”
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