India central bank focussed on growth, seen lagging on inflation fight -Breaking
MUMBAI (Reuters – India’s inflation is rising, but India’s central banks are likely to continue their loose policies even though global counterparts raise rates. It could be forced to catch up aggressively, according to analysts and economists.
This shift in expectation is indicative of a shifting view. Market participants claim that the Reserve Bank of India fears Russia’s invasion of Ukraine will damage the world economy and India’s chances of recovery.
In a Reuters poll, just half of the forecasters expected the RBI to increase rates at its April meeting. However, the three-week war has ended those projections.
RBI observers now believe the bank will remain neutral on April 8 despite inflation having fallen below the target range of 6% for the past two months.
Chief economist of Axis Bank Saugata Bhattacharya had previously expected that the RBI would raise its reverse-repurchase rates next week. However, global uncertainties have made it clear that “it makes sense” to keep things as they are.
In support of such expectations, Shakikanta Das, Governor at RBI, recently cautioned against “premature demand compression via monetary policy”.
Michael Patra, Deputy Governor of India said India’s economic growth is as low as it was in 2013. This happened after a U.S. shift to policy that sent capital flooding out from emerging markets. According to him, “The recent reverberations caused by war have in reality, tilted risk balance downwards” on the economy.
However, economists fear inflation will spiral outof control. This could hurt savers as well as investors. Most market participants believe that the RBI is behind the curve in addressing inflation.
STOKING THE RISK OF OVERHEATING
Economists predict that the RBI will increase its retail-inflation projection for Friday’s fiscal year by between 50 and 80 basis points, compared to the 4.5% currently.
The war in Ukraine, along with the economic sanctions imposed on Moscow will continue to push up prices for Ukraine’s grain and energy exports.
The likelihood of higher-than-expected inflation persisting in the wake of the Russia-Ukraine conflict has gone up. Churchil Bhatt (executive vice president, debt investments, Kotak Life Insurance), stated that the sooner we address it, the quicker we will have to catch up with it.
Rising asset prices could feed through to demand-side inflation, while savers are being hurt as their returns lag behind inflation, said Rupa Rege Nitsure, chief economist at L&T Financial Services.
She stated that “By keeping interest rate artificially low, there are more chances for aggressive tightening at later stages.”
BofA Securities’ emerging Asia forex strategist Abhay Gupta said that the RBI should “be alert for wider inflationary pressures.”
“Higher levels of uncertainty will reduce error margins and the markets would be forced to take into account higher probabilities that a policy mistake could occur,” he stated. He said that market interest rates should rise and the rupee should fall to reduce potential economic overheating.