India’s Central Bank Could Turn More Hawkish as Growth Quickens

India’s central bank may become more vigilant on inflation as economic growth strengthens, increasing the risk of monetary tightening.

The government raised its growth forecast for the year through March 2018 to 6.6 percent on Wednesday from 6.5 percent in January. The economy expanded 7.2 percent last quarter from a year earlier, beating the 7 percent median estimate in a Bloomberg survey and the previous quarter’s 6.5 percent.

“The better-than-expected economic performance could lead the Reserve Bank of India to step up its anti-inflationary rhetoric,” Prakash Sakpal, an economist at ING Groep NV in Singapore, said in a note after the data. “This, and the recent sell-off in the Indian rupee, could shift the consensus within the six-member RBI Monetary Policy Committee toward a rate hike.”

The RBI turned hawkish in the last monetary policy review in February as inflation quickened and as the government relaxed its budget deficit goals. It next meets to decide on interest rates in April.

“We expect the RBI to stay on hold through 2018, but risks are biased towards
tightening, especially owing to government policies tilting towards raising food price inflation,” Nomura Holdings Inc. analysts led by Sonal Varma said in a note.

What Our Economists Say….
The performance undershot expectations of the RBI. And a number of risks cloud the outlook, from rising bond yields to market volatility as the Federal Reserve looks to extend its tightening.

Bloomberg Economics’ view is that growth will continue to disappoint the RBI. That, coupled with a likely continued slowdown in inflation, will douse its hawkish mood.

–Abhishek Gupta, Bloomberg Economics

Inflation accelerated from as low as 1.46 percent in June to 5.21 percent in December before easing slightly in January. The central bank’s goal is to keep headline inflation close to 4 percent over the medium term.
Source: Bloomberg

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