September 26, 2018 / 5:27 AM / 3 months ago

CORRECTED-POLL-With an eye on faltering rupee, RBI to raise rates next week

 (Corrects to say deficit in both instances for current account
reference in paragraph 15. In paragraph 20, inflation is
expected to be significantly lower in the coming quarters, not
for the middle of 2019; also fixes expected average Q4 inflation
rate to 4.2 percent from 4.1 percent)
    * reuters://realtime/verb=Open/url=cpurl://apps.cp./Apps/cb-polls?RIC=INREPO%3DECI
 RBI poll data
    * reuters://realtime/verb=Open/url=cpurl://apps.cp./Apps/econ-polls?RIC=INGDPAP
 GDP poll data
    * Reuters poll graphic on biggest downside risk to the
Indian
economy: tmsnrt.rs/2xB8sNF?eikon=true

    By Anisha Sheth and Hari Kishan
    BENGALURU, Sept 26 (Reuters) - The Reserve Bank of India is
likely to raise interest rates in early October, despite
relatively tame inflation, to prop up a retreating rupee,
according to a Reuters poll of economists who also trimmed their
near-term growth forecasts.
    In an abrupt change from the last survey conducted two
months ago, which predicted rates would stay on hold until this
quarter next year, over two-thirds of 61 economists polled Sept.
19-25 said the RBI would lift the repo rate at least once by
year-end.
    Slightly over half said RBI Governor Urjit Patel and the
Monetary Policy Committee would deliver a 25 basis point rise to
6.75 percent at the Oct. 5 policy meeting, with one economist
calling for a 50 basis point rise.
    The predicted rate hike would be the RBI's third this year,
having lifted borrowing costs in June and August. The U.S.
Federal Reserve is forecast to raise rates on Wednesday - its
third this year - according a separate Reuters poll.           
    For many analysts, the retreating Indian rupee       , which
has tumbled nearly 15 percent since the start of the year and is
the worst-performing major Asian currency, is likely of concern
to policymakers.
    On Tuesday the rupee, hit recently by growing credit
concerns engulfing non-banking financial companies, was trading
at 72.68 to the dollar.             
    The finance ministry also wants the RBI to boost liquidity.
            
    "For the RBI, I think it becomes necessary to provide a
policy response. The question was only of timing," said Radhika
Rao, economist at DBS in Singapore.
    "Some would say it (rate hike) could have come sooner ... it
probably would have been a bit more beneficial. But better now
than never."
    If the RBI does raise rates, it would be the latest in a
series of emerging market central banks that have been pressured
into tightening policy in response to a tumbling currency.
    Fortunately for the RBI, the economy is doing well. The
Indian economy is forecast to expand by an annual rate of more
than 7 percent every quarter for the next two years, although
slower than the surprise 8.2 percent rate clocked last quarter.
    This means that India will remain the world's fastest
growing major economy, but economists have chopped forecasts
somewhat for coming quarters.
    "Although the high growth rate in Q2 might be partly
attributed to favourable base effects ... the underlying
dynamics of the Indian economy shows that virtually all
high-frequency data is flashing green," said Hugo Erken, senior
economist at Rabobank.
    Prices of crude oil         - the country's biggest import –
have surged by over 20 percent this year. 
    That in turn has swollen the current account deficit to an
average 1.9 percent of GDP in the fiscal year that ended in
March from 0.7 percent in the 2016-17 fiscal year.
    The deficit is forecast to widen further to 2.8 percent of
GDP in the fiscal year ending in March 2019, before easing
slightly to 2.5 percent in 2019-20.
    Just over half of 49 respondents who answered an additional
question said the biggest economic risk over the coming year was
higher fuel prices.
    
    
    The escalating U.S.-China trade war has not had a major
impact on India so far but has spurred on a broad selloff in
emerging market assets since the beginning of this year.
    The sharp fall in the rupee has not stirred much worry about
inflation, however, which was just under 3.7 percent in August,
slightly below the 4 percent where the RBI prefers it to be.
            
    Inflation is expected to average 4.1 percent this quarter
and 4.2 percent next - significantly lower than the predictions
in the last poll two months ago - but rise to 5 percent by the
middle of 2019.
    Economists were almost evenly split on whether a weaker
rupee posed the biggest upside risk to inflation, with 26 of 51
respondents saying it was.
    But even if the RBI raises rates on Oct. 5, it will still 
struggle to keep up with the Fed, which is expected to tighten
policy well into next year.
    "The RBI will have to do more, though that looks unlikely on
the grounds of on-target inflation and stress in the financial
sector," Prakash Sakpal, Asia economist at ING, wrote in a
research note.

    
 (Polling by Khushboo Mittal and Vivek Mishra; editing by Ross
Finley and Shri Navaratnam)
  
 
 
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