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Business News/ News / India/  Fitch expects RBI to hike repo rate to 5.9% by Dec-end on worsening inflation outlook

There is room for another 1% hike in key interest rate by end of this year. Fitch Ratings expects RBI to raise the policy repo rate further to 5.9% by December 2022 due to a deteriorating inflation outlook.

Fitch in its latest Global Economic Outlook released on Monday stated that given the deteriorating outlook for inflation, they expect RBI to lift rates further to 5.9% by December 2022.

Fitch expects the repo rate to rise further to 6.15% by the end of 2023 versus their previous forecast of 5%. However, it expects rates to be unchanged in 2024.

In Fitch's opinion, the Indian economy faces drawbacks such as a worsening external environment, elevated commodity prices, and tighter global monetary policy.

Further, the American credit rating agency said, inflation has risen to an eight-year high and broadens across more CPI categories, posing a severe challenge to consumers. In the past three months, food inflation has increased by an average of 7.3% year on year, while healthcare bills are rising at a similar pace, as reported by PTI.

In the last two monetary policies, RBI has hiked interest rate by 90 basis points. In May, RBI raised the repo rate by 40 basis points and further increased it to 50 basis points in June 2022 policy. Now, the repo rate stands at 4.9%.

RBI forecasts an inflation rate of 6.7% for the financial year FY23. RBI's medium-term target for inflation is 4% with a band of +/- 2% while supporting growth.

Inflation stays above RBI's comfort zone for the fifth consecutive month. In May, the consumer price index stood at 7.04%, although, it moderated from the 95-month high of 7.79% witnessed in April this year.

Fitch expects growth to likely improve in April - June quarter on a rebound in consumption as COVID-19 cases subsided towards end-March.

Taking a note of India's GDP growth of 4.1% in Q1 of 2022 compared to its forecast of 4.8%, Fitch lowered its Indian economy forecast to 7.8% in 2022-2023 compared to its previous estimate of 8.5%.

Last week, Fitch upgraded India's India's sovereign rating to 'stable' from 'negative' after two years citing diminishing downside risks to medium-term growth on rapid economic recovery. However, the rating was kept unchanged at 'BBB-'.

On the global front, Fitch said, inflation pressures continue to intensify, with increasingly adverse implications for the growth outlook. Recent Covid-19-related lockdowns in China are adding to global manufacturing supply-chain pressures. Energy and food supply disruptions from the Russia-Ukraine war are having a swifter impact on European inflation than expected. Inflation pressures are also building in the services sector, particularly in the US and UK, where tight labour markets are boosting nominal wage growth.

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Updated: 14 Jun 2022, 03:18 PM IST
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