RBI likely to turn hawkish as growth picks up pace

The RBI turned hawkish in the last monetary policy review in February as inflation quickened and as the government relaxed its budget deficit goals. It next meets to decide on interest rates in April.

The Reserve Bank of India may become more vigilant on inflation as economic growth strengthens, increasing the risk of monetary tightening.

A man walks past the Reserve Bank of India (RBI), in Mumbai, India.(Kunal Patil/ Hindustan Times)

The government raised its growth forecast for the year through March 2018 to 6.6% on Wednesday from 6.5% in January. The economy expanded 7.2% last quarter from a year earlier, beating the 7% median estimate in a Bloomberg survey and the previous quarter’s 6.5%.

“The better-than-expected economic performance could lead the Reserve Bank of India to step up its anti-inflationary rhetoric,” said Prakash Sakpal, an economist at ING Groep NV in Singapore, in a note after the data. “This, and the recent sell-off in the Indian rupee, could shift the consensus within the six-member RBI Monetary Policy Committee toward a rate hike.”

The RBI turned hawkish in the last monetary policy review in February as inflation quickened and as the government relaxed its budget deficit goals. It next meets to decide on interest rates in April.

“We expect the RBI to stay on hold through 2018, but risks are biased towards tightening, especially owing to government policies tilting towards raising food price inflation,” said Nomura Holdings Inc. analysts led by Sonal Varma in a note.

What Bloomberg economists say

The performance undershot expectations of the RBI. And a number of risks cloud the outlook, from rising bond yields to market volatility as the Federal Reserve looks to extend its tightening. Bloomberg Economics’ view is that growth will continue to disappoint the RBI. That, coupled with a likely continued slowdown in inflation, will douse its hawkish mood.

Inflation accelerated from as low as 1.46% in June to 5.21% in December before easing slightly in January. The central bank’s goal is to keep headline inflation close to 4% over the medium term.

--With assistance from Vrishti Beniwal and Archana Chaudhary.