India’s Central Bank May Raise Interest Rates Soon Due to Inflation Worries
MUMBAI, May 21 – Economists from Standard Chartered predict that India’s central bank might begin raising interest rates as early as June. This potential increase is fueled by rising inflation concerns linked to higher crude oil prices.
In their recent analysis, economists Anubhuti Sahay and Saurav Anand noted that the combination of rising global yields and interest rate hikes from other Asian central banks could push India to adjust its policy rates. They anticipate an increase of 50 basis points, likely split between June and August, although they suggest that if June does not see a hike, it could be fully implemented in August.
The Reserve Bank of India (RBI) is set to make its rate announcement on June 5, marking its second meeting since the onset of the Iran conflict. Last month, the RBI indicated it would monitor the situation and its impact on inflation closely.
Currently, India’s overnight index swaps are predicting a total of 125 basis points in rate hikes over the next year. If inflation exceeds expectations, perhaps due to ongoing commodity price pressures and a weakening rupee, economists believe rates could increase by an additional 25 to 50 basis points by the end of March.
Standard Chartered had previously expected India’s policy rate to remain steady at 5.25% for this financial year. However, they argue that raising rates could help stabilize market sentiment and mitigate second-order effects on the rupee and inflation.
The Indian rupee has struggled this year, suffering a drop of about 6% since the beginning of the Iran war, nearing the 97-per-dollar mark. As the world’s third-largest importer and consumer of crude oil, India has started increasing fuel prices and promoting austerity measures to conserve foreign exchange.
Domestic retail inflation was recorded at 3.48% in April, with forecasts for the fiscal year now suggesting it could rise to 4.9%, which is an increase of 20 basis points from earlier predictions. The central bank aims to maintain inflation around a target of 4%, within a tolerance range of 2% to 6%.
