The Reserve Bank of India is unlikely to increase the policy rate in response to a weaker currency, as has been done by the Bank of Indonesia, said Nomura economists in a research note on Friday.
The global financial services group attached a 25% likelihood of rate hikes in the next six months if global financial conditions tightened further and geopolitical risks arose, with RBI using its foreign exchange reserves as the first line of defence.
“We believe the bar for the RBI to hike policy repo rates in response to a weaker currency is high, because it is primarily a flexible inflation targeting central bank, and it will use other tools to mitigate risks,” said Nomura economists Sonal Varma and Aurodeep Nandi.
The Reserve Bank of India’s monetary policy committee, earlier this month, held the policy rate at 6.5% for the fourth consecutive meeting.
“Higher food prices will be met via more trade restrictions and supply-side interventions, while we expect domestic oil prices to be left unchanged given elections in states (Nov/Dec) and at a national level (March/April 2024), meaning higher fiscal and current account risks, but less inflation impact,” economists stated.
Inflation eased in September to 5% from 6.8% in the previous month, as LPG price cut and falling vegetable prices provided some succour.
“Core CPI inflation has eased sharply and annualised at 3.8% on a 3-month saar basis in September, while household inflation expectations have moderated to single digits for the first time since the pandemic. Both suggest that underlying inflation remains well-contained,” it said.
Reserve Bank of India projects inflation to average 5.4% for the year and decline to 4.5%, closer to its 4% target by FY25.
Nomura economists pointed to subdued rural demand and recovery in private capex as other reasons for no further rate hikes from the central bank.
“While not our base case, we believe significantly higher momentum in core inflation and a resurgence in inflation expectations could be triggers for the RBI to hike rates, rather than weaker currency,” economists stated.
