RBI to take hawkish stance by end-2018, hike rates early next year

The Reserve Bank of India will keep monetary policy steady at its April meeting but shift to a hawkish stance by the end of this year and raise interest rates early in 2019 as inflation pressures build, according to a Reuters poll of economists.

All 61 economists polled between March 23-28 expected the RBI to hold the repo rate at 6% and the reverse repo rate at 5.75% at its April 4-5 policy meeting.

The RBI is expected to keep rates steady for the rest of this year

After a slowdown in growth through much of last year, India is on an upswing and reclaimed top spot as the fastest growing major economy in the final quarter of 2017, outpacing China.

Inflation on the other hand has eased slightly, but still projected by the central bank to remain above its 4% medium-term target in 2018.

"The recent strength of the economy has belatedly shifted discussion from whether the RBI might cut policy rates again to whether it should hike," noted Shilan Shah, senior India economist at Capital Economics.

The RBI is expected to change its stance toward policy tightening by year-end, according to 60 percent of 33 economists, including four respondents who thought the shift would come as early as its June meeting.

"With growth-inflation data likely to be higher after April, we believe there is a risk of more hawkish rhetoric at meetings in June and beyond, including a change in policy stance," wrote Sonal Varma, chief India economist at Nomura.

The latest consensus is for the RBI to hike the repo rate and the reverse repo rate by 25 basis points in the first three months of 2019 and follow it up with another one in the quarter through to end-December.

Just last month, the consensus was for the central bank to hold fire until at least the second half of 2019.

"The forecast for inflation suggests that after a temporary decline, which we have already seen, inflation will move slightly higher and this will force a hike," said Dariusz Kowalczyk, senior economist for ex-Japan Asia at Credit Agricole CIB.

After hitting a low of 1.46% in June 2017, consumer price inflation steadily rose to a 17-month high in December. However, February's inflation print showed inflation at 4.4%, giving the RBI a breather.

According to the central bank's own projections, inflation is likely to average 5.1-5.6% for the first half of the 2018-19 fiscal year, before hovering around 4.5% for the remainder of the year.

While the median consensus of economists predicts a rate hike early next year, almost a third of respondents forecast the RBI will lift rates by the end of September.

Several of them also expect another rate hike before end-2018.

Against a backdrop of government fiscal slippage, the RBI would focus on "price stability", higher bond yields and sticky inflation near the upper band of its target, according to Vishnu Varathan, head of economics and strategy at Mizuho Bank.

"The fact that evidence of underlying inflation is picking up...should tilt them towards one rate hike to calibrate policy," Mizuho's Varathan said.

"The growth story is also going to align nicely with the RBI's position because we are coming off a soft base after the demonetization and GST impact ... the policy decision becomes less of a dilemma and the clarity with which they need to act solidifies in the second half of this year."

If the RBI does raise rates when expected, it would follow other major central banks which are already tightening policy.

The U.S. Federal Reserve raised rates in March and is expected to follow it up with three more hikes this year, according to a separate Reuters poll.