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In an attempt to tame persistently high inflation, central banks, globally, have been on a rate hike spree. India is no different. But when compared with central banks in other major Asian emerging market economies (EMEs), the Reserve Bank of India (RBI) comes out as the most aggressive in raising rates, even as many of its peers are yet to begin their rate hike cycle, showed an analysis by Motilal Oswal Financial Services Ltd. Note that economic fundamentals of India are similar in many EMEs.
A cumulative hike of 130 basis points (bps) in effective policy rate--i.e. the standing deposit facility rate and the repo rate hike of 90bps--by the RBI in the past three months is among the highest and the fastest, showed the analysis. One basis point is 0.01%.
Central banks in some Asian economies such as Indonesia and Thailand are yet to raise rates, while the quantum of rate hikes in Malaysia and Philippines have been lower when compared with India.
In this backdrop, the domestic brokerage house is of the view that RBI has been unduly aggressive in its monetary policy normalisation. Investors would remember that at the peak of the Covid-19 pandemic, global central banks had reduced interest rates.
"Either the domestic economic fundamentals (in the shape of a very strong GDP growth recovery and/or very high inflation) or the fear of a serious dislocation in financial markets (in the shape of currency depreciation or a sharp surge in bond yields) or a combination of both can defend such strong monetary tightening," added the Motilal Oswal report dated 11 July. GDP is short for gross domestic product.
Meanwhile, prices of commodities such as palm oil, soybean, petroleum coke and cotton, among others, have started to decline. Even so, economists expect the RBI to continue to raise interest rates until domestic retail inflation cools off meaningfully.