Economists see waning urgency for India's RBI to go for large hikes

Economists have started paring expectations on the size of India’s future interest rate hikes, with half-point moves seen dispensable, after consumer prices rose less than expected in June.
 

Citigroup Inc. economists expect a 35 basis-point increase in borrowing costs at the Reserve Bank of India’s next Monetary Policy Committee meeting in August, a move also predicted by Barclays Plc on the back of prices trending lower. 

The predictions follow Tuesday’s consumer price print that came in at 7%, a tad slower than expected. RBI Governor Shaktikanta Das, who led the MPC in raising rates by 90 basis points this year including a 50 basis-point action in June, has signaled that any further tightening would be geared to ensure the economy doesn’t slow down massively.

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Das’s signal Tuesday is based on expectations that inflation will moderate from the second-half of this fiscal year. That view on slowing price gains was endorsed by economists from Goldman Sachs Group Inc., who lowered their full-year average headline inflation forecast by 10 basis points to 7.1% for the year ending March.

“Falling commodity prices and lower than expected June quarter inflation could make the MPC refrain from a 50 basis point rate hike,” Citi economists Samiran Chakraborty and Baqar M Zaidi wrote in a report to clients. “The possibility of a larger rate hike can arise only if sustained depreciation pressure on the rupee forces the RBI to close down the interest rate differential faster.”

Beyond August, the MPC may resort to two quarter-point increases this year, according to Barclays economists led by Rahul Bajoria.