India’s central bank is expected to hold off on raising interest rates until December or later, with economists pointing to subdued core inflation despite recent increases in headline consumer prices. The outlook follows the Reserve Bank of India’s latest monetary policy decision, in which policymakers left interest rates unchanged while lowering their inflation projections for the current financial year.
The Reserve Bank of India maintained the status quo on rates on Wednesday and revised down its average retail inflation forecast by 10 basis points to 5% for this fiscal year. It also reduced its core inflation projection by 40 basis points to 4.3%, reinforcing expectations that underlying price pressures remain moderate even as headline inflation has edged higher.
The central bank’s stance prompted economists to push back against calls for an earlier tightening of monetary policy in Asia’s third-largest economy. Four economists said on Thursday that the RBI would likely begin raising rates only in December or later, reflecting confidence that inflation remains sufficiently contained to avoid an immediate policy response.
Governor Sanjay Malhotra struck a reassuring tone on the inflation outlook, stating there was no evidence that the recent rise in oil prices had translated into broader inflationary pressures across the economy. At the same time, he emphasised that the central bank would continue monitoring the potential second-round effects of higher fuel and food prices, indicating that policymakers remain alert to risks that could emerge over time.
Financial markets adjusted their expectations following the policy review. Overnight indexed swap rates, a closely watched gauge of interest rate expectations, declined after the announcement and now signal only 50 basis points of rate increases over the next year, compared with as much as 125 basis points anticipated during the peak of the Iran crisis.
Several major financial institutions subsequently revised their forecasts for the timing of the RBI’s first rate increase. Michael Wan, a senior currency analyst at MUFG Bank in Singapore, said the bank continued to expect the RBI to raise rates by a total of 50 basis points to 5.75%, but had delayed its expectation for the first increase to December from its earlier forecast of October.
India’s retail inflation accelerated to 4.38% in June, exceeding the RBI’s medium-term target of 4% for the first time in 17 months. However, core inflation remained contained at around 4%, reinforcing the view among economists that underlying inflationary pressures remain relatively subdued despite the increase in headline prices.
Some analysts believe the tightening cycle could begin even later if core inflation continues to underperform expectations. Goldman Sachs Chief India Economist Santanu Sengupta said that slower-than-expected growth in core inflation could delay the first rate increase until February. The bank now anticipates two 25-basis-point rate hikes, one in December and another in February.
India’s monetary policy trajectory has diverged from that of many other Asian economies, several of which moved more quickly to raise interest rates in response to inflation and currency pressures triggered by the oil price surge linked to the Iran war. Even so, some economists believe the RBI has scope to delay action further. Sameer Narang, head of economic group research at ICICI Bank, said any additional liquidity could be used to reduce short USD/INR forward positions, with the bank now expecting the first rate hike in April rather than December. HDFC Bank also postponed its forecast for the first increase to February from October, with principal economist Sakshi Gupta noting that the policy statement offered no indication that the RBI sees an immediate need to undertake durable liquidity absorption measures.
