Citi, others dial back India rate hike calls as inflation expected to stay moderate

MUMBAI: Controlled retail and core inflation in India are prompting some economists to push back expectations of any immediate interest rate hikes, reversing earlier calls for tighter policy to support the rupee and contain inflation.

Retail inflation rose to 4.38% in June, breaching the Reserve Bank of India’s 4% target for the first time in 17 months, but averaged 3.9% in the April-June quarter. Core inflation was estimated at about 4% in June, economists said.

This could mean that inflation for the full year could average 4.7% this fiscal year, lower than the 5.1% projected by the Reserve Bank of India in its June policy, Citi economists said in a note dated Monday.

“RBI will likely reduce its headline inflation forecast by around 20 basis points in August, reducing the need for an immediate rate hike,” said Citi’s chief India economist, Samiran Chakraborty.

“Future rate hikes might happen only if core inflation sustains above 4.5%, which is unlikely to happen soon and hence we do not foresee a rate hike in 2026,” Chakraborty added.

India’s retail inflation accelerates to 4.38%, raising rate hike expectations

The brokerage was expecting rate hikes of 25 basis points each in August and October earlier.

Interest rate swap markets have already started to reflect the probability of stable to mildly higher interest rates.

The one-year overnight indexed swap rate was reflecting 50 basis points of hike in this financial year, compared to 125 basis points prior to the June meeting.

SBI Economic Research, expects the RBI to maintain status quo through this financial year, with inflation averaging 5%.

ANZ has reversed its August rate hike call and now expects a status quo, saying the monetary policy committee has room to wait and reassess inflation risks.

In June, the RBI had maintained status quo on rates with theminutes of the meeting showing that most rate panel members did not see the need for a pre-emptive hike.

While keeping rates unchanged, the RBI announced measures to attract dollar inflows by subsidising overseas deposits and external borrowing by state-run companies and banks.

STCI Primary Dealer has also dropped its forecast for a rate hike this year, saying the central bank is likely to treat the recent rise in inflation as a temporary supply shock and avoid tightening policy in response.