India to Raise Interest Rates in June, Standard Chartered Forecasts

India's Central Bank Expected to Raise Interest Rates Amid Inflation Risks

India's central bank is likely to start raising interest rates as early as June due to increasing inflation risks from higher crude prices, according to economists at Standard Chartered. The Reserve Bank of India's rate-setting panel is set to announce its rate decision on June 5, in its second meeting since the Iran war began.

Rising global yields and rate hikes from other Asian central banks could also lead to higher policy rates. The economists expect 50 bps of hikes, split equally between June and August, or possibly 50 bps in August if there is no hike in June. This is a significant change from StanChart's previous forecast, which predicted that India's policy rate would remain unchanged at 5.25% in this financial year.

India's overnight index swaps are pricing in 125 bps of rate hikes over the next 12 months. The country could hike rates by another 25 to 50 basis points through March-end, if inflation turns out to be higher than expected due to continued pressure from commodity prices and a weak rupee. This is partly due to India's status as the world's third-largest importer and consumer of crude oil, with the country already starting to raise fuel prices and the government calling for austerity measures to save foreign exchange.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

Domestic Retail Inflation Forecast

The economists say that rate hikes would help anchor sentiment and contain second-order effects on the rupee and inflation. The Indian rupee is among the worst performing Asian currencies this year, having dropped around 6% through Wednesday since the start of the Iran war, coming very close to the 97-per-dollar level. The central bank targets inflation at 4%, within a tolerance band of 2%-6%.