The Reserve Bank of India (RBI) could raise interest rates by half a percentage point at its upcoming policy review, thanks to stubbornly high inflation and the pace at which leading global central banks are hiking rates, Morgan Stanley said.
Upasana Chachra, the chief India economist at Morgan Stanley, said in a note on Friday that the financial firm had earlier expected a 0.35 percentage point hike but “sticky inflation and continued hawkish stance of DM [developed market] central banks warrant continued front-loading of rate hikes in our view.”
In the RBI’s monthly bulletin released late on Friday, the Indian central bank said it will have to concentrate on its monetary policy at the outset to fight high inflation and shield medium-term growth.
Inflation in India has remained above the RBI’s tolerance level of 6 percent since January.
Risks to the inflation outlook are skewed upwards due to the uncertainty around changes in global commodity prices and the possibility of imported inflation if the exchange rate weakens, Chachra pointed out.
Despite revising its rate projection for the September 30 RBI decision, Morgan Stanley kept its terminal rate outlook unchanged at 6.50 percent but acknowledged that the risks were skewed towards an increase.
“The external environment remains challenging… with a stronger dollar and continued hawkish response from DM central banks,” Chachra said.
The US Federal Reserve this week is tipped to raise rates by 0.75 percentage point for the third straight time. There is an outside chance that it may even raise it by one percentage point. Meanwhile, the European Central Bank, earlier this month, took the more hawkish option and hiked rates by 0.75 percentage point.