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Most central banks have been raising interest rates to rein in inflation. However, a comparison with other large emerging market economies (EMEs) in Asia showed that the Reserve Bank of India (RBI) is the most aggressive, according to a study by Motilal Oswal Financial Services. In fact, some of India’s counterparts are yet to begin their rate hiking cycle.
“A comparison of 10 EMEs (accounting for 70% of EMEs) reveals the cumulative hikes of 130 basis points (bps) in the effective policy rate (i.e. the standing deposit facility rate and the repo rate hike of 90bps) by RBI in the past three months are among the highest and the fastest,” said the Motilal Oswal report dated 11 July. One basis point is 0.01%.
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Refer to the chart alongside. Countries such as Malaysia and Philippines have seen lower quantum of rate hikes than India. Even though Brazil and Mexico have seen their policy rates go up by 400 bps and 200 bps in H1CY22, respectively, their rate hiking cycle began much earlier in March 2021 and June 2021, respectively. Note that RBI started raising rates from May 2022. Indonesia and Thailand have yet to start rate increases.
Tanvee Gupta Jain, chief India economist, UBS Securities India, said the quantum of RBI’s interest rate hikes come in the backdrop of a sharp supply-side inflation. If it is not controlled via rate hikes, it will seep into household inflation expectations and create a vicious cycle.
“Considering the steep rise in consumer price index (CPI) inflation, the repo rate at 4.9% is still lower than the terminal repo rate of 6.5% as per our estimates. We expect RBI to continue to raise rates at its upcoming August policy meeting,” she added. Terminal rate is the point at which the repo rate hikes are expected to stop.
India’s retail inflation in June slightly eased to 7.01% from 7.04% in May, but remained above RBI’s comfort zone of 2-6%.
Given that the prices of fruits and vegetables tend to spike during the monsoons, CPI inflation is expected to remain high in the near-term. That’s not all. Manufacturers and services providers continue to increase product prices. “The theme of passing-on of increased input cost burden will continue to play out in the coming months,” said Madan Sabnavis, chief economist, Bank of Baroda. So, CPI inflation will hover in the 6.5-7.5% range and start moderating post October-November, he added.
At its upcoming policy meet in August, RBI is expected to hike repo rate by at least 25 bps.
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