HSBC sees slower rate hikes by RBI towards year-end on growth worries

India’s central bank may slow down the pace of its monetary tightening by the end of the year as economic growth will lose momentum with waning demand, according to HSBC Holdings Plc.

“RBI will not be that aggressive toward the end of the year because growth will begin to slow then and it is very conscious about the sacrifice ratio,” HSBC’s Chief India Economist Pranjul Bhandari said in an interview to Rishaad Salamat and Haslinda Amin on Bloomberg TV Monday. “When you hike rates too much then it starts hurting growth.”

India’s central bank has cumulatively raised rate by 90 basis points so far this year to tame prices that have stayed above its 6% ceiling since the beginning of the year. Data due later Monday is likely to show consumer prices gains staying above 7% in May due to high food and fuel costs. 

“A lot of the pass-through is still to happen,” she said, adding that price pressures will stay for the rest of the year. 

HSBC is expecting the RBI to take repo rate to 6% by the middle of the next year, from 4.9% now.

Asia’s third largest economy had shown resilience on the back of pent-up demand after reopening from Covid, but rising prices risk hurting the nation’s nascent recovery.

“The entire pent-up services demand doesn’t last forever. We are seeing the first signs of export slowing and that can hurt GDP growth if it continues,” Bhandari said. “The growth momentum right now is 9% but toward end of year it will be closer to 5%.”

Meanwhile, the local currency rupee slid past 78 per dollar for the first time Monday as a global risk off spurred by expectations of aggressive Federal Reserve tightening weighed on emerging-market assets and stoked fears of more equity outflows. 

“It will have inflationary implications, but perhaps not very large,” Bhandari said. “The good thing is India still has a big stock of foreign exchange reserves. There are lot of buffers out there which is still providing some sort of stability to the rupee.”