India's Rate Tightening Cycle Nearing End: Economist
The Reserve Bank of India (RBI) is widely expected to hike its key policy rates by 25 basis points at its next meeting on May 3rd as it battles stubbornly high inflation. Many economists are warning that India's central bank remains behind the curve on inflation, despite raising rates 8 times since March 2010. But, according to Credit Suisse, India's central bank is actually nearing the end of its rate tightening cycle.
Robert Prior-Wandesforde, Director of Non-Japan Asia Economics at Credit Suisse believes India's policymakers will increase rates just 50 basis points more, with two 25 basis point hikes in the coming months. That puts the bank's economics team at odds with other firms. Standard Chartered, for example, is forecasting a total of 100 basis points of hikes this year. Deutsche Bank is forecasting 75 basis points of increases.
So why is Credit Suisse forecasting an end to rate hikes earlier than everyone else?
"As the year progresses, the cumulative effects of those interest rate rises are going to start biting, and they're going to start hitting growth," Prior-Wandesforde told CNBC.
He expects India's economy to grow at a slower 7.5 percent rate in 2011 and 2012, down from last year's growth rate of 8.4 percent.
As a result, Prior-Wandesforde told CNBC, India's central bank will go into an extended pause as it starts taking "growth preservation under consideration." Credit Suisse also believes that India's central bank will be among the first in Asia to begin reducing rates, with cuts in the benchmark lending rate as early as the first quarter of 2012.
Further, high oil prices , which have risen around 20 percent this year will put a brake on India's growth. India's government has been trying to limit the impact of higher oil prices by subsidising fuel prices. But as the budget deficit rises, Credit Suisse believes the government will be forced to pass on those costs to consumers, which will further constrict growth.