RBI May Resort To Rate Hike As Early As June Amid Geopolitical Uncertainty, High Crude Oil Prices

The Reserve Bank of India (RBI) could begin raising interest rates as early as June, as inflation risks rise due to higher crude oil prices and global economic uncertainty, according to economists at Standard Chartered Bank. The forecast comes at a time when oil prices have surged following tensions in West Asia, putting pressure on countries like India that depend heavily on crude oil imports. Economists at the bank expect the RBI’s Monetary Policy Committee (MPC) to raise the repo rate by 50 basis points (bps) in total this year, likely split between June and August. However, if the RBI skips a hike in June, the bank believes a larger 50 bps increase could come in August instead.

The RBI’s MPC is scheduled to announce its next policy decision on June 5. The central bank had earlier maintained that it would closely monitor the economic impact of the US-Iran conflict and rising commodity prices before taking any action.

Economists at Standard Chartered said in a note that rising global bond yields and interest rate hikes by several Asian central banks may also push India towards tighter monetary policy. Countries such as Indonesia and the Philippines have already raised rates to tackle inflation and currency weakness.

The Indian rupee has been under significant pressure in recent weeks. Since the beginning of the US-Iran conflict, the currency has fallen nearly 6 per cent and touched record lows near 97 against the dollar. Market participants are increasingly betting that the RBI is likely to tighten policy to stabilise the currency and contain inflationary pressures.

India’s retail inflation stood at 3.48 per cent in April, still within the RBI’s target range of 2-6 per cent. However, the brokerage expects inflation to rise further as higher fuel prices gradually affect transportation and daily goods. Standard Chartered has raised its inflation forecast for the current financial year to 4.90 per cent, slightly above its earlier estimate.

The brokerage had previously expected the RBI to keep rates unchanged this year. But the recent spike in oil prices and the weakening rupee have forced a reassessment. Economists have warned that continued pressure on commodity prices and the currency could lead to additional rate hikes of 25-50 bps by the end of the financial year.