Strong economic growth gives RBI more room to hike interest rates: Report

Strong growth prospects for the Indian economy will provide the Reserve Bank of India (RBI) with more room for further interest rate hikes, DBS Group Research said in a report on Thursday. “The stance of (RBI’s) ‘withdrawal of accommodation’ suggests that benchmark rates are not yet at neutral levels, presumably one-two hikes away,” it said.

It expects India’s first quarter (April-June) growth to be at 16 per cent. The official GDP is expected to be issued on August 31. It maintains an overall FY23 growth forecast at 7 per cent, which will see India emerge as the fastest-growing economy in Asia this year.

“Broad-based improvement in vaccination rates and relaxation of lockdowns benefited urban consumption, particularly on the back of a resumption in service sector activity, including contact intensive entertainment venues, hospitality, domestic/ international travel, restaurants, theatres etc,” Radhika Rao, senior economist at DBS Group Research, wrote in the report. Unemployment rates, it said, have returned to pre-pandemic levels, with wage growth also improving, even as the labour participation rate lags 2019 levels.

“Public capex is likely to be a bigger support in this cycle as private sector participation might be in the slow lane, due to rising input prices and renewed uncertainty over the global growth outlook,” Rao wrote. However, unfavourable external fundamentals will act as counterweights, it opined. They include impact of the heatwave on farm output followed by uneven start to the monsoon, sharp rise in commodity prices impinging on corporate margins and of course an uncertain global environment.

For the record, the monetary policy committee of the RBI in its latest meeting raised the repo rate by 50 basis points to 5.40 per cent in order to contain the persistently high inflation. The latest hike took the repo rate above pre-pandemic levels of 5.15 per cent. Raising interest rate typically suppresses demand in the economy, thereby helping inflation to decline. India’s retail inflation has been over the RBI’s upper tolerance band of 6 per cent for the seventh consecutive month in a row now.

In line with the global trend of monetary policy tightening to cool off inflation, the RBI has so far hiked the key repo rate — the rate at which the central bank of a country lends money to commercial banks — by 140 basis points in three instances. “With 140 basis points worth tightening behind us, we look for 60 basis points more hikes in the repo rate within FY23. Our call is for 35 basis points hike in September followed by another 25 basis points in December to take the repo rate to 6.0 per cent, before settling into an extended pause,” the report added. (ANI)

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