By Devayani Sathyan and Prerana Bhat

BENGALURU, (Reuters) – The Reserve Bank of India is expected to follow up its unexpected May rate increase with another rise at its next meeting. This was according to a majority of analysts polled for Reuters. They were extremely divided on the magnitude of the change.

India’s retail inflation rose to an 8-year peak in April. However, it was still above the bank’s threshold limit for a fourth consecutive month and is expected to remain elevated.

This sudden shift in outlook on inflation and the best ways to control it suggests that the RBI will most likely lower the repo rate (currently at 4.40%) to its pre-pandemic levels next quarter, and not 2023, as originally thought.

The latest Reuters poll revealed that over 25 percent of economists (14 of 53) expected the RBI’s rate hike to 4.75% by March, with 20 expecting a greater move ranging anywhere from 40 to 75 basis points. Ten others forecasted a 50 basis-point increase.

Twelve people forecasted a moderate rate hike (10-25 basis point), and seven said there would be no movement at the June 6-8 meeting.

A source told Reuters that the RBI was likely to raise its inflation projection for current fiscal year. It will also be considering increasing interest rates.

However, the extraordinary division of opinions on how RBI will respond to its unexpected 40 basis points move on May 4 highlights the problem facing forecasters. Forecasters were caught off guard and did not receive clear guidance as to what the next steps would be.

Upasna, senior economist at Kotak Mahindra Bank said that she expects to see the June second action to give an accurate picture of the policy normalization scale and pace. She is forecasting a 35 basis-point rise in 4.75% as the median prediction for June.

But she added that “markets are clear on one account, that there is going to be aggressive policy rate hikes because inflation is the biggest threat at this point in time.”

RBI monetary policy outlook https://fingfx.thomsonreuters.com/gfx/polling/zdpxoglakvx/Reuters%20Poll-%20RBI%20monetary%20policy%20outlook.png

The aggressive outlook is partly reflective of what central banks had predicted to do. This includes the U.S. Federal Reserve which was anticipated to raise rates by 50 basis point at its forthcoming meetings, following an earlier similar move.

A third of the respondents (17 out of 53) predicted that the repo rate would be at 5.15% in the next quarter. This is back where it was prior to the pandemic. Twenty other rate forecasters predicted higher rates.

There were more rate hikes in the future, reaching rates of 5.40% and higher at the end-2022.

A smaller number of respondents, who forecasted the year ending next year for 11 of 15 people, saw the repo rates reaching 5.75% and higher.

The chances that the RBI will join its peer banks in raising 50 basis points are higher now than ever before.

A mere half (22 of 41) of those who answered an additional question saw a chance for a 50% or greater chance of the RBI increasing the rates by 50 basis points. Others saw only a low or negligible chance. This was a drastic change from the survey last month where most respondents saw these chances as very low.

“​Communications out of the RBI could have been a lot better…this kind of surprise move certainly does not help with policy credibility,” said Tuuli McCully, head of Asia-Pacific economics at Scotiabank.

I can see the reasoning behind their actions, but communication is not a smooth process if someone says one thing and does the opposite the next.

However, the surprise RBI repo rate rise was still a significant factor in the credibility of the bank. More than half of those surveyed (24 out of 34) responded that it made things better, and the remainder said they did little or nothing.