RBI may keep rates higher for a while, says Shubhada Rao

RBI may keep rates higher for a while, says Shubhada Rao

India’s central bank will likely go for one more quarter point rate increase next week, in line with the US Federal Reserve, but domestic compulsions may result in a pause after that, said Shubhada Rao, founder of economic research firm QuantEco Research.

The Reserve Bank of India, like most emerging market central banks, will closely follow what its American counterpart has been doing, but “need not follow every step of what Fed does,” said Rao in an interview with Bloomberg. “Domestic compulsions will somewhere also begin to guide the central bank’s policy direction.”

The RBI’s six-member rate-setting panel will meet April 3, 5 and 6 to likely raise the benchmark rate for a seventh successive time after inflation jumped above the central bank’s upper target band of 6% in the first two months of the year. Persistently high core inflation, over 6% for 17 straight months, is holding back policymakers from easing on rates amid early signs of a demand slowdown.

While there are signs of cooling demand in urban areas, rural demand stays “fairly strong” on the back of better agricultural growth over the last few quarters. “If growth shows a dramatic slowdown only then RBI would perhaps be prompted to start cutting rates,” said Rao, but such easing may only come in the fiscal year that starts in April 2024.