The Reserve Bank of India will follow its surprise May rate rise with another hike at its meeting next month, according to a majority of analysts who were extremely divided on the size of the move.
India's retail inflation soared to an eight-year high in April, remaining above the central bank's tolerance limit for a fourth month in a row, and is likely to stay elevated.
The RBI will likely take the repo rate back to pre-pandemic level next quarter, and not in 2023 due to the sudden change in views on surging inflation and how to tame it.
Twelve respondents predicted a modest rate rise from 10 to 25 basis points, while seven saw no move at the June 6 -- 8 meeting.
The RBI is expected to raise its inflation projection for the current fiscal year and consider more interest rates at the meeting, a source aware of the developments told Reuters.
There is a challenge facing forecasters who were completely taken off guard and not given guidance on what comes next after such an exceptional splintering of views on how the RBI will follow up on its unscheduled 40 basis point move on May 4th.
We need to see the second action. In June, we're going to get a grip on what is the scale of policy normalisation that we can expect and the pace as well, said Upasna Bhardwaj, senior economist at Kotak Mahindra Bank, who predicts a 35 basis point rise to 4.75%, the median forecast for June.
She added that markets are clear on one account that there is going to be aggressive policy rate hikes because inflation is the biggest threat at this point in time. The U.S. Federal Reserve, which was expected to hike rates by 50 basis points at its upcoming meeting earlier this month, is expected to hike rates by 50 basis points after a similar move earlier this month.
Nearly one-third of respondents, 17 of 53, predicted the repo rate at 5.15% next quarter, back to where it was before thepandemic. More interest rates were on the way with rates reaching 5.40% or higher by the end of 2022.
Respondents from a much smaller sample who had forecasts going to the end of next year, 11 of 15, saw the repo rate hit 5.75% or higher.
The chances that the RBI will join some of its peers in hiking 50 basis points is stronger now than before.
Just over half of the respondents to an additional question, 22 of 41, saw a high or very high chance of a 50 basis point RBI rate hike at the next meeting, while the rest saw a low or very low chance. That was an abrupt change from a survey taken last month, where the majority saw those chances as low.
Communications out of the RBI could have been a lot better. Tuuli McCully, head of Asia-Pacific economics at Scotiabank said that this kind of surprise move does not help with policy credibility.
I see their reasoning about why they felt like they couldn't wait any longer and had to act, but it certainly is an issue. If they say something and then act the other way, it doesn't help with the communication. More than two-thirds of respondents, 24 of 34, said better while the rest said worsened or did nothing when asked what the RBI's surprise repo rate hike did for its credibility.