MUMBAI: India's central bank is likely to start raising interest rates as early as June on increasing inflation risks from higher crude prices, economists at Standard Chartered said in a note on Thursday.
Rising global yields and rate hikes from other Asian central banks could also lead to higher policy rates, StanChart's India economists Anubhuti Sahay and Saurav Anand said in a note.
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"We expect 50 bps of hikes, split equally between June and August. However, if there is no hike in June, the repo rate could be hiked by 50 bps in August."
The Reserve Bank of India's rate-setting panel is set to announce its rate decision on June 5, in its second meeting since the Iran war began. Last month, the RBI had said it would watch the duration and extent of the conflict-led disruptions.
India's overnight index swaps are pricing in 125 bps of rate hikes over the next 12 months.
India could hike rates by another 25 to 50 basis points through March-end, if inflation turns out to be higher than expected due to continued pressure from commodity prices and a weak rupee, the economists said.
StanChart's previous forecast was for India's policy rate to remain unchanged at 5.25% in this financial year.
The economists say rate hikes would help anchor sentiment and contain second-order effects on the rupee and inflation.
The Indian rupee is among the worst performing Asian currencies this year and had dropped around 6% through Wednesday since the start of the Iran war, coming very close to 97-per-dollar level.
India is the world's third-largest importer and consumer of crude oil. The country has started raising fuel prices and the government has called for austerity measures to save foreign exchange.
Domestic retail inflation, which stood at 3.48% in April, is forecast at 4.9% this fiscal year, up 20 bps from the previous estimate, StanChart economists said.
The central bank targets inflation at 4%, within a tolerance band of 2%-6%.
