RBI Stays Put Amid Global Rate Hikes

India's central bank is expected to keep interest rates unchanged this week, diverging from many of its global peers as inflation remains modest despite higher global oil prices. Central banks in Europe, Australia, Indonesia, the Philippines, Singapore, South Korea, and South Africa have raised benchmark borrowing costs since the US-Israeli war on Iran began five months ago.

Despite retail inflation accelerating to 4.38% in June, above the RBI's 4% target for the first time in 17 months, it remains within the 2%-6% tolerance band the central bank uses to allow room to deal with short-term supply shocks. Core inflation, which excludes volatile prices of food and fuel, has also remained contained near 4%.

While inflation expectations have risen, a central bank survey showed in May, suggesting that pressures are building, RBI Governor Sanjay Malhotra told the Hindu BusinessLine newspaper in an interview published last week that signs of higher fuel prices feeding into more generalised inflation remain limited. The RBI's Monetary Policy Committee is likely to hold rates steady on Wednesday, as 68 of the 72 economists in a Reuters poll predicted.

However, interest-rate swap markets are pricing roughly 75 basis points of rate hikes over the next 12 months. Trinh Nguyen, senior economist for Emerging Asia at Natixis, said that the RBI's measures to support the rupee have attracted nearly $40 billion in inflows, but the currency has come under pressure as renewed hostilities in the Gulf lifted oil prices.