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The Reserve Bank of India may consider raising interest rates later this year as higher US bond yields threaten to make Indian assets less attractive to global investors and rising food prices add to inflation pressures, Deloitte Chief Economist Rumki Majumdar said.
Majumdar said the RBI faces a difficult policy choice as strong domestic credit growth argues against a rate hike, while higher yields in the US and rising inflation could force it to act to support capital flows and keep price pressures under control. The question is when. May not be in October. It might be, if not in October, but maybe later in the year in December, Majumdar said, adding that the RBI would contemplate a rate hike to ensure inflation remains under control and capital flows stay anchored. The RBI has so far had reasons to keep rates steady, including inflation not reaching a level requiring immediate intervention and strong credit growth, she said. Bank balance sheets are improving and industry credit demand is near an all-time high, with growth rates touching 20%. In a situation like this, any rate hike would actually stymie that credit growth, Majumdar said, explaining why the central bank has been hesitant to raise rates. However, higher US yields are narrowing the interest-rate differential with India, which reduces the premium for global investors and could trigger capital outflows. The moment that premium narrows, it becomes very less incentivizing for global investors to invest in India, she said. After strong foreign portfolio inflows, a reversal in capital flows was already being seen following the US Federal Reserve's rate hike, she added. Majumdar also expects crude prices above USD 100 a barrel to be temporary, with prices eventually normalising at USD 80-90 as geopolitical uncertainty eases. Anything between $80 to $90 should be a good manageable situation for India, she said. Despite these risks, she expects India's economic growth to remain strong. Projections have been raised from an earlier 6.7%, with growth expected at 7.6% in the second quarter and 7.4% in the third quarter, while full-year growth is seen at 7.1-7.4%. Festive spending and pent-up demand are expected to support activity. On equities, Majumdar said Indian markets could remain broadly flat for some time as global uncertainty and valuation concerns weigh on sentiment after strong post-COVID gains. She said India has also underperformed some peers, while global investors are considering alternative opportunities, including AI investments. There could be a possibility of overvaluation, she said, adding that investors may now look for further reforms and growth drivers to sustain India's growth. Over the longer term, she expects reforms and growth opportunities to attract investments back, while inflation and geopolitical uncertainty remain key risks. (ANI)
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