NEW DELHI: Morgan Stanley Research believes India’s central bank will start hiking interest rates from the first quarter of the next calendar, initiating policy normalisation. It will subsequently raise policy rates in each of the next three quarters, it forecasts.
The research house said in the beginning of the next year, India will join four other Asia-region economies–Australia, South Korea, Indonesia and Malaysia–which will begin policy normalisation, whether in form of rate hikes or tapering of bond buying programmes.
“With the backdrop of a more robust recovery taking hold,as well as demand-led inflationary pressures starting to build, we expect central banks in the region to start a process of gradual monetary policy normalization, with about five central banks in the region hiking interest rates or tapering by Q1CY22,” said analysts at Morgan Stanley.
One of the biggest risks to the market is rising inflation, which many see will force economies to action. Many officials at the US Federal Reserve have said the tapering should begin by the end of the current year.
Minutes published Wednesday of the US Federal Reserve’s latest policy meeting gave the impression of a looming cut in its massive, pandemic-era bond-buying programme. Rising inflation has also sparked fears that global central banks would start to rein in their easy money policies that have been instrumental in lifting global stock indexes to record highs.
Though, it should be noted, till now inflation has been transitory in most of Asian region, something that has also been pointed out by the RBI. On a two-year CAGR basis, inflation prints are broadly stable to lower. Price level trends (both headline and core) in the region remain lower than their pre-pandemic trend in aggregate.
“We do expect a full-fledged recovery to take hold in the region, we would similarly expect demand-side inflationary pressures to build. This is why for most economies in the region, we expect higher CPI in 2022 as compared to 2021. However, we do not foresee inflation breaching the central banks’ target/comfort zones to the upside,” said Morgan Stanley.
“Though we expect the normalisation of monetary and fiscal policies to begin from 2022, we see the policy stance as still accommodative. Policymakers will proceed cautiously in withdrawing accommodation because they will be concerned over lingering downside risks posed by the virus,” it added.
RBI has raised its inflation outlook for the next fiscal year. In fact, after a long time, division occurred among Monetary Policy Committee members in the last meeting, one of whom voted to change the accommodative stance of the RBI.