RBI has space for more rate hikes despite growth cheer

Kolkata: The central bank Wednesday raised its FY27 growth estimates by 40 basis points – or twice the quantum of projected incremental increase in consumer inflation – to underscore undiminished local demand, although economists believe policymakers have created the space for further increase in rates if prices were to quicken rapidly.

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One basis point is a hundredth of a percentage point.

While raising FY 27 growth estimates to 7.1%, Reserve Bank of India (RBI) Governor Sanjay Malhotra cited resilient private consumption and sustained investments.

"The upward revision in growth forecast by 40 bps further underscores the strength of economic activity despite significant headwinds," Governor Malhotra stated.

Mint Road’s revision comes a day after the World Bank raised India’s full-year growth forecast – to an identical 7.1%.

The central bank projected the second quarter GDP growth at 7.2%, third quarter at 6.9% and fourth quarter at 6.8%.

Still, scanty rains and high fuel prices have the potential to stoke farmgate prices and inflation, Governor Sanjay Malhotra said.

"Looking ahead, global economic uncertainty and supply chain disruptions are
expected to have some bearing on domestic economic activity. Furthermore, the weak southwest monsoon along with strong El Nino conditions may impact the upcoming rabi season and rural demand," RBI said.

The central bank has projected the inflation at 5.2% for the fiscal, 20 basis points more than what it had said in the August policy meeting.

Persistent price pressures leave room for further hardening of interest rates going forward, economists said, while citing the change in stance by policymakers to "calibrated tightening" as they raise the repo rate by 25 basis points to 5.5%.

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"We continue to see 25-50 bps of additional rate hikes going ahead, with further upside if global risks persist," Kotak Mahindra Bank chief economist Upasna Bhardwaj said.

Governor Malhotra, meanwhile, said price pressures are increasingly visible across a range of commodities within the food component, apart from oil. There are also early signs of inflation becoming generalised are also evident from the increase in core inflation and higher inflation across a larger segment of the basket that makes up the Consumer Price Index (CPI).

Headline inflation, measured by CPI, is expected to average almost 5.8% in the next three quarters and core inflation projected at 4.4% this financial year.

The RBI projected the CPI at 4.9% in the second quarter, 6% for third quarter 5.7% for the fourth quarter.

"Continuing commodity prices pressures are likely to put upside pressure on inflation as growth remains resilient allowing quick pass-through of input prices to retail prices," said Garima Kapoor, deputy head of research, at Elara Capital.