Home / Economy / Q1 GDP, Fed posturing may put brakes on RBI rate hikes

June quarter economic growth that turned out lower than expected, and the US Federal Reserve’s decision on interest rates later this month could influence the pace of the Reserve Bank of India’s (RBI’s) policy rate hikes in the future, economists said.

India’s GDP grew 13.5% from a year ago during the first quarter, below RBI’s projection of 16.2%. For FY23 as a whole, RBI has projected economic growth of 7.2%.

The central bank’s monetary policy committee (MPC) is expected to raise policy rates at its meeting on 30 September.

“We are forecasting a 25 basis points (bps) hike in the 30 September policy at this stage, though it could be 35bps as well, particularly if the Fed decides to deliver a 75bps hike on 21 September," said Kaushik Das, chief India economist, Deutsche Bank.

“We will wait for more global and domestic data points to finalize our rate call before the RBI’s policy decision on 30 September. Given that April-June GDP growth has disappointed significantly compared to RBI’s forecast, we will not be surprised, if RBI decides to slow down its pace of rate hikes to 25bps clips from September onwards, as we are forecasting currently," Das said.

The main global data points that will be watched are US non-farm payroll figures, CPI and the Fed decision while the domestic indicator will be India’s August CPI, which is expected on 12 September.

In August, RBI raised the repo rate by 50 basis points to 5.4%, taking cumulative rate hikes since May to 140 basis points. The majority of the monetary policy committee members are in favour of front-loading rate increases to bring inflation within the RBI’s 2-6% target range and reducing the need for aggressive rate hikes in the future.

The recent Federal Reserve statement may also influence the quantum and speed of the rate hike cycle.

“GDP growth in Q1FY23 trailed the MPC’s projection of 16.2%. We also expect the CPI inflation to mildly undershoot the MPC’s forecast for the ongoing quarter. Based on the domestic growth inflation dynamics, we believe that the next rate hike in September 2022 should be of a smaller quantum than the 50 bps each seen in the last two policy reviews," said Aditi Nayar, chief economist, Icra.

Separately, economists have cut the GDP growth forecast for FY23 to below 7.2%.

“We are now revising our annual GDP growth for FY23 to 6.8%, a large part of which is a statistical adjustment with growth momentum likely to show an increasing momentum in the second half of the current fiscal year. The downward revision is mostly to do with our Q1GDP estimate that was at 15.7%," said Soumya Kanti Ghosh, chief economist, State bank of India, adding that lower growth in Q1 could compound RBI’s rate decision at the next policy meeting.

Some economists, however, rule out any impact on the RBI policy decision on 30 September.

“Notwithstanding the slight miss in June quarter growth vs official projections, the RBI MPC is focused on tackling inflation and the GDP outcome is unlikely to alter the rate hike path. With 140 bps worth tightening behind us, we look for 60 bps more hikes in the repo rate within this year, which will leave the real rate in positive territory by end-FY23," said Radhika Rao, senior economist, DBS Group.

Nomura expects a 35 bps repo rate hike in September and a final 25 bps hike in December, before RBI shifts to an extended pause.

ABOUT THE AUTHOR

Gopika Gopakumar

Gopika Gopakumar has worked for over 15 years as a banking journalist across print and television media. Her expertise lies in breaking big corporate stories and producing news based TV shows. She was part of the 2013 IMF Journalism Fellowship Program where she covered the Annual & Spring meetings of the International Monetary Fund in Washington D.C. She started her career with CNBC-TV18, where she also produced a news feature show called Indianomics and an award winning show on business stories from South India called Up South. She joined Mint in 2016.
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