PIMCO, a global fixed income manager, expects India's central bank to raise rates by a cumulative 75 basis points over the course of this tightening cycle, according to a senior executive who said on Tuesday that the firm holds a neutral stance on Indian assets.
Stephen Chang, Managing Director and Asia portfolio manager at PIMCO, said in an interview that India's economic growth remains strong, but inflation risks driven by food and energy prices have resurfaced.
India's central bank raised its key rate to 5.50% last week — the first hike in nearly four years — and shifted to a "calibrated tightening" policy stance, signaling further rate increases ahead.
"We expect the Reserve Bank of India to continue tightening policy, though we believe the eventual rate adjustment will be closer to 75 basis points, while the market is currently pricing in around 100 basis points," Chang said. He did not specify over what timeframe those hikes would be implemented, however.
As a key gauge of rate expectations, India's overnight index swaps (OIS) suggest the eventual repo rate will reach 6.25% to 6.50%, implying a cumulative 100 to 125 basis points of hikes over the next 12 months.
PIMCO said the Federal Reserve's tightening cycle has also influenced the Reserve Bank of India's (RBI) decision-making. Chang noted that while domestic conditions are the primary driver, the stability of the rupee's exchange rate and the outlook for Fed rate moves have also played a role.
"Given current valuation levels and the various intertwined effects from oil prices and Fed policy dynamics, we currently hold a roughly neutral view on Indian assets."
The Indian rupee has been fluctuating near 95 against the dollar, with markets closely watching the currency's movement; the central bank has already introduced measures to support it and pledged to take further action if the rupee's depreciation intensifies.
Since October 10, the RBI has announced a series of stringent measures, including channeling oil companies' foreign exchange purchase needs into dedicated channels and imposing cash margin requirements on forex hedging transactions related to import debt and banks' own balance sheets.
Chang said these measures are aimed at curbing speculative pressure and mitigating the impact of elevated oil prices on the rupee's exchange rate. Benchmark Brent crude prices are hovering around $105 per barrel, exacerbating inflation and external sector risks for India, which relies heavily on imports.
RBI Governor Sanjay Malhotra said in an interview on Tuesday that the measures are intended to ensure hedging operations serve genuine needs rather than speculative trading; he added that the central bank stands ready to take further action to maintain a smooth and orderly exchange rate. Chang said the measures also send a signal that the RBI is prepared to respond to excessive currency depreciation and intends to draw a line of defense as the dollar-rupee exchange rate approaches the 100 level.
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