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Rate hikes to continue despite imminent slowdown

While the fiscal second quarter growth may be just half of what it was in the first quarter, the central bank may not still put a brake on raising interest rates as price pressures continue.

Economists have factored a lower growth for the September quarter at 6.5 percent compared to 13.5 percent in the June quarter. Despite risks of a further slowdown, the Reserve Bank is still expected to deliver a 35 to 50 basis points ( one bps is 0.01 percent) rate hike to manage inflation within the mandated band of 2-6 percent.

Besides higher than comfortable inflation numbers a weak rupee could also be a trigger to raise rates to attract foreign currency flows to stabilize the rupee which has already lost over 10 percent in value so far this calendar year. ” As India’s GDP growth softens over the next few quarters on the back of slowing global growth expectation, we believe the balance of concerns will tip from inflation to growth, come 2023″ said Pranjul Bhandari, chief economist, India and Indonesia at HSBC. ” As such, we believe the December hike could be the last one for now. We expect a 50bps increase in the December policy meeting, taking the repo rate to 6.4%. This, we believe, is necessary to lower inflation and restore external balances”.

Even as the growth slows, India’s economic growth rate is still better than emerging market peers giving the central bank more leeway to focus on inflation. Also, on a sequential basis, the December quarter GDP is likely to increase, reversing September quarter’s contraction. A resilient domestic backdrop and pent-up demand continued to prop up India’s growth, according to Barclays Capital. “While we see room for continued outperformance, India’s growth trajectory is pointing to a soft landing, as the impact of slowing global activity,” said Rahul Bajoria, chief India economist at Barclays Capital. ” Overall, a strong growth trajectory should support an RBI rate hike to contain inflation. We expect the MPC to deliver a 35bps rate hike at the December meeting, bringing the repo rate to 6.25% before it shifts to a neutral stance.”
Even though October inflation numbers indicate some moderation in prices, a lot of the softening in prices is reckoned to be on account of base effect. Headline CPI is expected to remain above RBI’s upper threshold of 6%, in the remainder of FY’23 making case for a further rate hike. “Base-effect played a major role in bringing down the year-on-year inflation rate in October. Indeed, if there was no base effect the October print would have been above 7% year-on-year” said Gaura Sen Gupta, economist at IDFC First Bank. ” We expect RBI to hike the repo rate by 50bps in December”.

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