Robust Growth Gives RBI Room For More Rate Hikes: Report

The strong growth offers room for the Reserve Bank of India to raise rates by another 60 basis points as the central bank seeks to stamp out high inflation, DBS Group Research said in a note on Thursday.

The gross domestic product (GDP) in the first quarter of current fiscal year likely surged 16% year-on-year based on most leading indicators, the research house estimated.

Favourable base effect after the onset of Delta coronavirus variant last year will additionally lift the year-on-year GDP numbers, Radhika Rao, senior economist at DBS Group Research, wrote in the note.

"Resumption in service sector activity added to the momentum, besides manufacturing," Rao said. The research house's fiscal year 2022-2023 GDP growth forecast of 7% year-on-year will see India emerge the fastest-growing economy in Asia this year, she pointed out.

Broad-based improvement in vaccination rates and relaxation of lockdowns benefited urban consumption, while unemployment rates returned to pre-pandemic levels, Rao said. On the investment side, "lead indicators have been encouraging."

"Resilient growth provides the room for RBI to prioritise inflation," she said. She expects RBI to raise rates by another 60 bps in the current fiscal year, adding to the 140 bps already done.

The retail inflation rate has remained above RBI's upper tolerance limit for seven straight months.

"Our call is for a 35 basis points hike in September, followed by another 25 basis points in December to take the repo rate to 6.0%, before settling into an extended pause."