Swati Bhagat

MUMBAI (Reuters – A rise in Indian Interest Rates on Wednesday is expected. This will increase pressure on bond yields, and make it more difficult for the central bank to implement measures to improve liquidity.

There is no doubt that interest rates are rising. The Governor of the Reserve Bank of India (RBI), stated May 23 that it would not be difficult to make the decision.

Reuters polled economists and they expect a gain of between 25 and 75 basis points. The increase will come after a 40-basis point rise in May which kicked off central banks’ tightening cycle. However, economists believe it to be quite short.

Radhika Rao is senior economist at DBS Bank. Radhika said that an RBI policy meeting hike this week would be a foregone conclusion.

“Inflation continues to be high over the past three year, even though drivers have changed from supply bottlenecks and commodities to commodities to reopening pressures,” she said.

The retail prices rose 7.79% in April compared to the previous year. This was above the RBI’s inflation tolerance of 2% to 6.6%, for the fourth consecutive month. Expect inflation to continue rising in the immediate future.

Shaktikanta das, the RBI Governor, stated late last month that while its primary objective was to reduce inflation closer to target, it couldn’t ignore economic growth concerns.

On Wednesday, the market prices in an approximately 50-basis point increase.

Analysts expect that the RBI will reduce liquidity and intensify its fight against inflation. They also anticipate the RBI expanding its efforts to restore monetary conditions to before the economic crisis.

BofA Global Research noted that “we see the RBI continuing to implement liquidity” in a June 3rd note. The research firm predicted a 50 basis-point rise in the cash reserve ratio for banks (CRR), which will absorb approximately 870 billion rupees into the banking system.

Rao from DBS stated that “further CRR rises are in the cards to reduce the liquidity surplus, aid transmission”, i.e. to support increases in interest rates which will affect the economy.

Tendency will increase, pushing bond yields higher. In 2022 the benchmark yield of the 10-year bond has already increased by more than 100 basis points. This was driven by rising oil prices worldwide and expectations for higher short-term rates.

The government has been increasing its borrowing requirements with fiscal measures that are intended to keep inflation down, including cuts in customs duties and fuel excise taxes. According to economists, such fiscal measures will need to be continued.

Therefore, the central bank could have to help it buy bonds again and hold down yields.

Shilan Shah (Capital Economics senior India economist) stated that asset purchases via G-SAP, the government securities acquisition program, could be reinstated if central banks felt it was necessary to limit fiscal risk.

The central bank increased its inflation forecast for April. They predicted that average retail prices would rise 5.7% in the period March-2023 compared to a year ago. It is anticipated that it will increase the forecast further on Wednesday according to economists.

They say that the gross domestic product projection for 2022/23 will likely remain unchanged at 7.2%.