Goldman Sachs Sees Higher Inflation And Interest Rates For India
Better economic growth and higher inflation will increase pressure on the RBI to raise interest rates.
Rising consumer prices in India will keep up pressure on the Reserve Bank of India to hike policy rates. That’s the expectation from Goldman Sachs for the financial year 2018-19.
Headline inflation may accelerate to 5.3 percent in FY19 from an expected 3.4 percent in FY18, Goldman Sachs said in its India Outlook 2018 report. Higher commodity prices, particularly oil and coal, increase in housing rent allowance for government employees and normalisation of benign food inflation are expected to push consumer prices higher, the report said.
Higher inflation, coupled with a pickup in the economy and rising interest rates in the U.S., may prompt India’s central bank to increase its benchmark lending rate by 75 basis points overall in the coming year.
Goldman Sachs said the rate hikes may come in three tranches - 25 basis points each in Q3FY19, Q4FY19 and Q2FY20.
The RBI had kept interest rates unchanged in its previous policy review in August, even as calls for a rate cut grew louder with economic growth at a three-year low and stagnant private sector investments. Michael Patra, a member of the monetary policy committee that decides on rates, had cautioned that the RBI must be ready to raise rates again if the underlying drivers of inflation strengthened.
Goldman Sachs expects the Indian economy to grow at an accelerated 8 percent in the next fiscal further from a projected 6.4 percent in fiscal 2018, as “idosyncratic shocks of demonetisation and GST implementation” fade and the mega-bank recapitalisation improves credit growth.
The MPC is likely to take a somewhat patient approach in this particular (rate hiking) cycle as private investment growth would have only begun to pick up.Goldman Sachs India Outlook 2018
The RBI will be reluctant to cut policy rates further to support the economy amidst rising inflation, according to Goldman Sachs. It also expects bank lending rates to fall over the coming year as the recapitalisation of state-owned banks will lead to greater competition.
