The dovish Reserve Bank of India needs to start tightening monetary policy given that inflation is becoming more of an issue in the country, said Christopher Wood, global head of equity strategy at Jefferies.
The Consumer Price Index-based inflation has now been above the Reserve Bank of India’s threshold of 6% for the past three months, said Wood.
The CPI in March rose 6.95% year-on-year, the highest figure since October 2020.
In his weekly note to investors titled ‘Greed and Fear’, Hong Kong-based Wood noted that the RBI has effectively raised the policy rate by 40 basis points at its meeting last Friday by introducing a standard deposit facility rate at 3.75% to replace the 3.35% reverse repo rate.
Wood said one positive factor is the high level of foreign exchange reserves which have risen to $606 billion from $400 billion in early 2019. India’s foreign exchange reserves had touched a peak of $642 billion in September 2021.
The Indian central bank kept the headline repo rate unchanged in its meeting earlier this month. The six-member monetary policy committee also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward and support growth.
Some economists have started expecting that the repo rate is likely to be hiked by at least 25 basis points in June.
“With the inflation outturn materially to the upside and momentum still rising, we are lifting our terminal repo rate forecast to 6% by the third quarter of 2023, with a 25 basis points rate hike at each of the next eight MPC meetings,” said Nomura in a note.
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