The Reserve Bank of India may defy market expectations and adjust its benchmark rate at its upcoming monetary policy meeting this Friday.
A majority of economists surveyed by CNBC expect the Reserve Bank of India to hold its policy rate steady at 5.25%, merely signaling a potential hike later in the year. However, a minority of institutions believe policymakers might opt for an immediate rate hike at this week's meeting to defend the rupee, which has hit record lows.
Ahead of the RBI's decision, CNBC conducted a special survey of nine economists.
Venugopal Garre, Head of India Research and Managing Director at Bernstein, stated on CNBC's 'Focus India' program that a rate hike would be the more logical choice for the Indian central bank.
"A rate hike would align with the recent trend of global central bank tightening and could help stem capital outflows," he said. "The persistent depreciation of the local currency is currently the most challenging issue for Indian policymakers."
Several neighboring countries have already preemptively raised rates to combat inflation and stabilize their currencies, with some hikes exceeding market expectations.
Indonesia, also grappling with a weakening currency, surprised markets with a 50-basis-point rate hike on May 20th. The Central Bank of Sri Lanka raised its policy rate by 100 basis points on May 26th, its largest single hike in four years.
The rupee is under pressure from a rising import bill and persistent capital outflows, prompting Prime Minister Narendra Modi to publicly appeal for foreign exchange conservation.
According to Reuters, Indian regulators have already intervened to stabilize the currency, with state-owned banks selling dollars in the market to support the rupee while also increasing import duties on gold to reduce forex outflows for gold purchases.
Although the rupee has rebounded slightly from its historic low, it remains near the critical psychological level of 100 per dollar, ranking among Asia's worst-performing currencies.
The USD/INR spot rate was quoted at 95.6175, up 0.3753%.
In a May 25th interview with Indian financial newspaper Mint, Reserve Bank of India Governor Sanjay Malhotra stated the central bank would use all necessary tools to ensure orderly conditions in the foreign exchange market. While not explicitly mentioning a rate hike, his wording signaled the central bank is prepared and does not rule out strong regulatory measures.
Inflation Concerns Fuel Rate Hike Expectations
Another major factor increasing the probability of a hike is rising inflation risks.
While current Indian inflation remains below the central bank's 4% policy target midpoint, a combination of rising energy prices, currency depreciation, and climate-related crop damage is creating upward pressure on inflation, potentially forcing the central bank into a preemptive hike.
Sakshi Gupta, Chief Economist at HDFC Bank, noted that the pass-through of energy price increases to consumer goods and disruptions from the El Niño climate pattern are elevating future inflation uncertainty.
In April, India's CPI inflation rose for the sixth consecutive month to 3.48%, despite retail fuel price controls. Over the past two weeks, India has raised retail fuel prices multiple times, with a cumulative increase of 7.5 rupees per liter (approximately $0.08), exceeding Citigroup's earlier estimate of 5 rupees. Consequently, Citigroup has raised its full-year inflation forecast for FY2027 (ending March 2027) from 4.6% to 4.9%.
Citigroup's research suggests the Monetary Policy Committee is likely to hold rates in June but predicts 25-basis-point hikes in both August and October.
Triple Threat from Fuel, Fertilizer, and Food
Worsening El Niño forecasts could force the RBI to revise its inflation projections upward and hike rates sooner. El Niño refers to a periodic natural warming of sea surface temperatures. The RBI's April meeting already warned that El Niño poses a threat to domestic prices.
UN Secretary-General António Guterres stated there is a 90% probability of El Niño developing in the coming months, urging global vigilance for severe climate impacts.
India's meteorological department has downgraded its monsoon rainfall forecast, predicting rainfall at just 90% of the long-term average, down from an April estimate of 92%, potentially marking the worst monsoon in 11 years. India is currently experiencing extreme heat, with nearly 60% of its agricultural output dependent on monsoon rains.
India's food inflation rose to 4.2% in April from 3.87% in March. Maximo Torero, Chief Economist at the UN's Food and Agriculture Organization, warned of fertilizer shortages ahead of India's critical monsoon sowing season.
In a report released by the Asian News International on April 22nd, he wrote that if geopolitical conflicts in the Gulf persist and the monsoon remains weak, India would face higher import costs and fertilizer supply constraints, leading to significantly higher inflation for staple foods like wheat, rice, and vegetables.
Comments