RBI May Hike Rates as Indian Assets Become Less Attractive to Global Investors

Deloitte Chief Economist Rumki Majumdar predicts that the Reserve Bank of India (RBI) may consider raising interest rates later this year. This decision is due to higher US bond yields, which are making Indian assets less attractive to global investors, and rising food prices adding to inflation pressures.

The RBI faces a difficult policy choice as strong domestic credit growth argues against a rate hike, while higher yields in the US and rising inflation could force it to act to support capital flows and keep price pressures under control. Majumdar said that the RBI would contemplate a rate hike to ensure inflation remains under control and capital flows stay anchored.

The current interest-rate differential with India is narrowing due to higher US yields, reducing the premium for global investors and potentially triggering capital outflows. Strong foreign portfolio inflows have been seen in the past, but a reversal in capital flows was already being seen following the US Federal Reserve's rate hike, Majumdar added.

Despite these risks, she expects India's economic growth to remain strong, with projections raised from 6.7% to 7.1-7.4%. Festive spending and pent-up demand are expected to support activity, while inflation and geopolitical uncertainty remain key risks.