Aftab Ahmad and Nupur Aand

NEW DELHI, (Reuters) – India’s central bank will likely raise its inflation projections for current fiscal year during its June monetary policy meeting. It also may consider further interest rate increases. This was confirmed by a source who knew of the developments on Wednesday.

After an emergency meeting, earlier in the month, the Reserve Bank of India raised its repo rate 40 basis points to 4.40%. This was its first rate increase in almost four years.

RBI increased its inflation forecast for current fiscal year from 5.7% to 120 bps, 120 bps higher than its February forecast, and reduced its economic growth forecast to 7.2% in 2022/23, down from 7.8%.

According to a source who declined to identify themselves because the conversations are confidential, the RBI “certainly” will raise the forecast in June as it didn’t want to in the May off-cycle emergency meeting.

Although the source didn’t give details about how much, the source said the RBI’s current outlook trails that of the International Monetary Fund’s 6.1% inflation forecast for India.

MPC’s next meeting will be held June 6-8.

The MPC decided to do an off-cycle hike because it didn’t want to make a huge hike at two meetings, in June and august. Source said they were trying to spread it around.

On the back of higher food prices, inflation in March soared to 7%. That’s a 17 month high. For three consecutive months, it has been at or above RBI’s upper limit of 2%-6% tolerance range. It is expected to stay there in April.

In order to mitigate the impacts of the COVID-19 Pandemic and other anti-virus actions, the RBI lowered the repo rates by 115bps. According to a source, it is looking at reverseing those reductions faster than expected.

Prior to the Ukraine crisis, the RBI forecasted that retail headline inflation would peak around March. Then it would fall towards 4% by the end of the second quarter in 2022/23.

‘KILLING DEMAND’

Rising borrowing costs could hurt India’s economy, and the central bank will likely be fully focused on fighting inflation.

“The RBI stated in the past that inflation was caused by supply problems. This narrative is still valid, but the supply constraint has worsened. Source said that RBI was now forced to do so.

The source stated that all central banks, including RBI in the fight against inflation will “kill whatever demand” within the next 6–8 months.

“The danger of stagflation continues to be high. The world’s largest central banks don’t have any weapons against it. Let’s wish that does not happen,” the source said.

According to the European Central Bank, Russia’s invasion in Ukraine may lead to high inflation and low growth.

Officials also stated that RBI would help government reduce bond yields by using different instruments. However, the amount of assistance will not be the same as in the past two years.

Reuters reports that the government asked the central banking to buy back bonds of the government or to conduct open-market operations to reduce yields, which have risen to their highest level since 2019 (Reuters report).

To prop up the rupee which dropped to an all-time low of 77.47 dollars against the dollar on Monday, the RBI sold dollars. If volatility persists, it intervened again in the market.

According to an official, the central bank is not targeting particular levels and does not want “jerky” movements exceeding 0.50 Indian Rupees per dollar over one day.