DBS Economist Sees Prolonged Pause in Interest Rate Hikes

RBI Interest Rate Outlook Remains Prolonged Pause

The Reserve Bank of India (RBI) is likely to maintain a prolonged pause on interest rates, according to DBS Bank Executive Director and Chief Economist Radhika Rao. Rising geopolitical tensions in the Middle East and elevated oil prices are expected to keep sentiment under check, posing an upside risk to inflationary pressures.

Oil Price Expectations

Oil prices are expected to remain elevated, with a sustained period above $70 per barrel posing an upside risk of roughly 30 basis points to inflation. However, the RBI is expected to absorb excess liquidity in the system later this month, supported by incremental easing measures.

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Banking Liquidity

The banking system has remained in surplus, with a series of quasi or incremental easing measures keeping call rates around 25 basis points below the repo rate. The authorities' preference to maintain surplus liquidity appears aimed at easing money market conditions and mitigating funding pressures.

RBI Policy Stance

The RBI is expected to maintain a neutral stance, with any action on interest rates contingent on future developments. The previous MPC review indicated a neutral stance, and the decision to hold rates at the February meeting reflected the policy committee's constructive assessment of growth and inflation dynamics.

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Macroeconomic Risks

The duration and intensity of the conflict in the Middle East will be key in determining the extent to which risk appetite is affected and the degree to which elevated energy prices weigh on demand. A sharper and sustained rise in oil prices above $70 per barrel could pose an upside risk to inflation, assuming excise duties remain unchanged.

Liquidity Management

The RBI is expected to focus on managing liquidity in the system, with steps to absorb excess liquidity likely to resume early in the next financial year. The scale of bond switches has been increased, reducing total gross borrowing in FY27, but adding to the stock of longer-dated maturities.