India's supposedly neutral central bank sounds decidedly hawkish

Today’s rate hike is unlikely to be the last given inflation is accelerating.



Craig Botham
Senior Emerging Markets Economist

Against a backdrop of rising inflation, India delivered a hike in line with market expectations, taking its benchmark rate to 6.5% from 6.25%. The Reserve Bank of India (RBI) said it maintained a neutral stance, though this has not prevented two hikes so far this year.

This is unlikely to mark the end of the hiking cycle given recent inflationary developments, with risks emanating from fiscal policy, oil, and the currency.

Higher inflation not just down to energy

Headline inflation in India has been accelerating fairly steadily since the lows reached in mid 2017, and now stands at 5%.

The fuel element of CPI has seen a definite surge on the back of higher international oil prices and a weaker rupee, but the rise is not just an energy-driven move. Even extracting fuel and food from headline inflation, we find that the core rate of inflation in India has also been accelerating, from a low of 3.9% to 6.4% in the latest data.

The central bank expressed concern about the impact of the government’s minimum support prices for crops, which will have an impact on food inflation as well as second round effects on the headline number.

In addition, household inflation expectations are for further acceleration, the central bank believes the output gap has “virtually closed”, and is also worried that fiscal slippage could have adverse consequences for inflation.

Chance of another rate hike this year

Perhaps to defend its statement that it maintains a neutral stance, the RBI did reference a softening of commodity prices and a reduction in GST (Goods and Service Tax) rates which could act to moderate inflation.

However, in the press conference and in its written statement, the central bank sounded sanguine on the growth outlook, while forecasting quarterly inflation to accelerate from 4.6% this quarter to 5% in the first quarter of the next fiscal year.

On the whole, the RBI sounds like it is positioned to deliver an additional hike this year, potentially at its October meeting.


Craig Botham
Senior Emerging Markets Economist


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