RBI Expected to Tighten Policy Amid Domestic Pressures
The Reserve Bank of India (RBI) is poised to raise interest rates by 25 basis points in its upcoming monetary policy decision, according to DK Joshi, Chief Economist at Crisil. Speaking to CNBC-TV18, Joshi indicated a strong likelihood of a subsequent hike in December, driven by a confluence of domestic economic factors.
Joshi identified three primary drivers for the expected tightening: a deficient and distorted monsoon, elevated oil prices linked to the West Asia crisis, and stronger-than-expected first-quarter GDP growth. He warned that these factors are creating pressures that could lead to broader, generalized price increases.
"The demand pressure on inflation will be much more and the input costs, whether it is fuel or it is agriculture, commodities, I think if they rise, there is a danger of they becoming generalised in nature," Joshi stated. He noted that while the central bank's growth forecast is likely to be revised, its inflation forecast may also be tweaked upwards.
Global Context and Yield Differentials
Beyond domestic issues, global financial dynamics are influencing the RBI's decision-making. Joshi highlighted that the yield differential between Indian and US 10-year bonds has narrowed significantly to nearly 190 basis points, down from approximately 450 basis points three years ago. Despite these headwinds, he anticipates a "shallow cycle of rate hikes" and "calibrated tightening" rather than an aggressive tightening phase.
Paul Gruenwald, Global Chief Economist at S&P Global Ratings, echoed the view that central banks worldwide are adjusting their stances in response to inflation moving away from targets and the risk of second-round effects. However, he does not view this as a protracted tightening phase.
"Most central banks, in our view, are recalibrating their monetary policy position in light of what's going on in the Middle East," Gruenwald said. He estimates that for most major central banks, this recalibration will result in 50 to 75 basis points of hikes, rather than several hundred points of tightening.
US Bond Market Dynamics
Addressing the persistent sell-off in the US bond market, Gruenwald pointed to three key driving factors: elevated US fiscal deficits, recent inflation spikes, and massive long-term financing demand from technology companies building data centres.
According to S&P Global Ratings data, hyperscalers are undertaking $800 billion in capital expenditure this year, a figure expected to rise over the next couple of years. These companies are competing with the government at the long end of the bond market, driving yields higher.
"When you put all three of those together that I think explains a lot of the upward pressure we've seen on yields at the long end of the U.S. and that's probably not going to change materially anytime soon," Gruenwald concluded.