India's central bank will likely begin hiking rates in December or later as core inflation in the economy remains low, four economists said on Thursday, pushing back calls for tighter monetary policy in Asia's third-largest economy.
The Reserve Bank of India maintained the status quo on rates on Wednesday, and revised down its average retail inflation forecast by 10 basis points to 5% for this fiscal. It also slashed its core inflation projection by 40 basis points to 4.3%.
While Governor Sanjay Malhotra was sanguine on inflation, saying there was no evidence that recent higher oil prices were leading to broader inflation pressures, he added the central bank will continue to watch for the second-round effects of higher fuel and food prices.
Overnight indexed swap rates, a key gauge of interest rate expectations, fell after the policy review, now signalling only 50 basis points of hikes over the next one year, down from as much as 125 basis points at the peak of the Iran crisis.
"We continue to see RBI hiking rates by 50 bps to 5.75% but push out the timing of the first hike to December from our previous expectation of an October move," said Michael Wan, a senior currency analyst at MUFG Bank in Singapore.
India's retail inflation accelerated to 4.38% in June, moving above the RBI's medium-term target of 4% for the first time in 17 months. However, core inflation remained contained close to 4%.
If core inflation rises slower than forecast, there are risks that the first rate hike could be deferred to February, said Goldman Sachs' Chief India Economist Santanu Sengupta. The bank now expects a 25 bps move each in December and February.
India is an outlier among peer Asian economies that chose to raise rates quicker to respond to inflation and currency pressures brought on by the Iran war-driven oil price spike.
"Any extra liquidity could be used to pare down (short USD/INR) forward positions," said Sameer Narang, head of economic group research at ICICI Bank, which now expects the first hike in April instead of December.
HDFC Bank also pushed back its call to February against an earlier expectation of October, with principal economist Sakshi Gupta noting that the policy statement offered no indication that the RBI sees an immediate need to undertake durable liquidity absorption measures.
