RBI Interest Rate Hike Likely as Inflation Risks Mount in India

Economists Dhiraj Nim and Abhishek Upadhyay from ANZ Research and ICICI Securities Primary Dealership, respectively, believe that inflation risks are building in India. They point to higher oil prices, broad-based price pressures, and rising global yields as complicating factors for the Reserve Bank of India's policy outlook.

Nim expects a hawkish shift by the US Federal Reserve to put further pressure on the rupee and imported inflation, bringing forward the case for an RBI rate hike. Upadhyay agrees, expecting inflation to remain sticky at around 6% for the next three quarters.

Both economists expect India's growth to remain around 7%, but note that risks from energy prices and tighter global financial conditions are increasing. Nim highlights the potential for oil prices above $100 as a major risk factor, while Upadhyay points out that core inflation has picked up to 4.2%.

Regarding liquidity, Upadhyay suggests that RBI's open market sales of ₹1 trillion may not be sufficient to draw liquidity, and recommends a 50-basis-point CRR hike as a potential solution. Nim agrees that a CRR hike is likely, but notes that the RBI will need to balance the impact on banks' liquidity.

Nim also comments on the rupee's prospects, noting that higher global interest rates and a delicate balance of global trade are making it challenging for central banks and governments to manage currency markets.