Due to the persistently high inflation and the speed at which other major central banks are raising rates, Morgan Stanley predicted that the Reserve Bank of India would increase interest rates by 50 basis points at its upcoming policy review.
“We were earlier expecting a 35 bps increase, however, sticky inflation and continued hawkish stance of DM (developed market) central banks warrant continued front-loading of rate hikes in our view," Upasana Chachra, chief India economist at Morgan Stanley, said in a note on Friday.
The Indian central bank stated that in order to combat high inflation and safeguard medium-term growth, it will be necessary to front-load its monetary policy.
Since January, India's inflation rate has exceeded the Reserve Bank of India's 6% tolerance level.
Due to the uncertainty surrounding changes in commodity prices globally and the potential for imported inflation if the exchange rate weakens, Chachra noted that risks to the inflation outlook are skewed upward.
Morgan Stanley maintained its terminal rate outlook at 6.50% despite changing their rate projection for the RBI decision on September 30 but acknowledged that the risks were tilted in favour of an increase.
"The external environment remains challenging ... with a stronger dollar and continued hawkish response from DM central banks," Chachra said.
For the third time in a row, the U.S. Federal Reserve is expected to raise interest rates this week by 75 basis points. There is a remote possibility that it could increase it to 100 bps. Earlier this month, the European Central Bank chose to be more hawkish and increased interest rates by 75 basis points.
The dollar index is currently hovering around 110, which is a 20-year high.
