On Friday, Shaktikanta Das, the Governor of the Reserve Bank of India (RBI) is scheduled to announce the new financial year’s first monetary policy. Central banks all over the world have begun to hike interest rates in order to combat the rising inflation, but the RBI has left interest rates untouched so far and has remained supportive of economic growth. However, it is important to note that the Indian central bank is walking a tight-rope. While there is certainly increase in economic growth, it does require some policy support. There has been a rise in inflation and negative real rates are definitely affecting the savers.
The aim of the Reserve Bank of India (RBI) is to ensure that economic growth continues to accelerate and inflation remains low, while simultaneously providing receivers with positive real rate. A recent report from BofA said that they do not think the RBI will change key rates. But, it may decide to revise their inflation forecast. According to some experts, there does not seem to be a credit offtake and the system appears to have ample liquidity. Even though the RBI wants to support economic growth, the high inflation could prove to be a challenge.
Therefore, the Indian central bank may decide to keep the rates constant for now and keep their stance accommodative. Most experts have confirmed that they do not expect the Reserve Bank of India (RBI) to hike up interest rates this week, but they do expect them to shed some light on the future course to be followed where the monetary policy is concerned. They believe the RBI will provide information about tightening in the future and will also revise their inflation estimates. Inflation has become a major challenge for the central bank as well as investors with fixed incomes.
There is an inflationary spiral because global central banks infused liquidity for fighting the economic slowdown that had occurred because of the coronavirus pandemic. After the meeting of the Monetary Policy Committee (MPC) in February, RBI had predicted an inflation rate of about 4.5%, as long as the monsoon is normal. As for the consumer price inflation in India, it had increased to 6.07% in the same month. Inflation could further increase because of the oil shock brought on by the Russia-Ukraine conflict. There has been a gradual increase in the fuel prices in India and inflation numbers would reflect this soon.
According to HSBC Global Research, if the price of oil remain around $100 per barrel, then the inflation figure for the current financial year would be around 5.6%. The MPC could face difficulty because of imported inflation due to edible oils, crude oil and metals. According to some experts, this might prompt the Reserve Bank of India (RBI) (which is also responsible for cryptocurrency regulation) to increase interest rates sooner rather than later. They expect that it would switch its accommodative stance to neutral and their April review and announce a 25 basis point increase in the reverse repo rate.
The discussion over rate hikes has been the focus of most fixed-income investors. There has also been a steady rise in rates in the bond markets, but there has not been much progress when it comes to increase in fixed deposit rates and repo rates, which have stayed between 5% and 5.5%. Thus, investors have been forced to accept negative real rates. While it does not make sense for investors to lock their money in the long-term, it does not mean they should sit on cash either.
It is better for investors to go with short-duration options right now, depending on what financial goals they may have. But, this does not mean that opting for bank savings accounts, liquid funds, or very short-term fixed deposits is a smart move. The RBI’s announcement may give clues about the pace and extent of the hike in interest rates to be expected in the future, even if it does not happen tomorrow.
