To combat inflation, economists anticipate more aggressive rate hikes from the RBI.

After a long-anticipated rate hike on Wednesday, economists expect India’s central bank to frontload additional aggressive interest rate hikes in its effort to manage excessive inflation, at least until its repo rate reaches its pre-Covid level of 5.15 percent.

Most economists now expect a total of 125-150 basis points in rate hikes over the next 12 months, compared to approximately 50 basis points three months ago, on the basis that global oil, food, and manufacturing prices are likely to continue around 7% for at least three months longer.

In its first-rate hike in nearly four years, the Reserve Bank of India’s Monetary Policy Committee (MPC) raised the benchmark repo rate – the rate at which it lends to banks – by 40 basis points to 4.40 percent, while also raising banks’ cash reserve ratio by 50 basis points to mop up about $11.4 billion in surplus liquidity from the market.

In a note to clients, Sonal Varma, chief economist at Nomura, wrote, “We feel the rate hike is a belated admission of the inflation risks and that policy has been behind the curve.”

Nomura expects retail inflation to stay at 6.6 percent year over year in the fiscal year that began in April, and has raised its forecast for the main interest rate to 5.75 percent by December, up from a previous projection of 5 percent, and to 6.25 percent by the second quarter of 2023, up from a previous projection of 6 percent.

It expects a 35-basis-point rate hike at the RBI’s MPC meeting in June, followed by a 50-basis-point boost in August and 25-basis-point hikes at subsequent sessions till next April.

Many private economists believe that, unlike some other central banks, the RBI has been in denial for a long time, disregarding inflationary pressures that propelled retail inflation to near 7% in March, with signs that it could stay beyond the central bank’s tolerance band for the next two quarters.

Inflation has risen to multi-year highs in most nations, owing to a rebound in economic activity and a worsening of widespread supply chain disruptions in the aftermath of Russia’s invasion of Ukraine, pushing several central banks to boost interest rates.