RBI likely to raise rates, tighten monetary policy: Goldman Sachs

India’s central bank could start tightening monetary policy from next fiscal year as consumer prices rise, according to Goldman Sachs Group Inc.

“Inflation is going to determine what the RBI does over the course of next year,” Santanu Sengupta, senior India economist at Goldman said in an interview with Juliette Saly and Rishaad Salamat on Bloomberg TV. “Input cost increases for the manufacturers will get passed on to consumers over a period of time as the economy reopens and pricing power comes back.”

Companies is India have been seeing a pressure on their margins as supply side constraints and global commodity prices increase input costs. That’s seen pushing up overall inflation as some of those firms have started raising prices for customers. 

“We are first expecting the RBI to continue with liquidity tightening that’s going on right now, then hike reverse repo by 40 basis points,” Sengupta said, forecasting 75 basis points of repo rate hikes in 2022. He sees inflation at around 5.8% next year, higher than an estimated 5.2% in the current year.

The central bank is broadly expected to keep its policy rates unchanged at its meeting next week. Data due later Tuesday will likely show gross domestic product expanded 8.3% in the three months through September, staying on track to deliver the fastest growth among major economies this year. But there are potential risks coming from the new omicron coronavirus variant.

“With respect to new variant, it’s too early to incorporate anything into our forecast,” Sengupta said. “We will be watching this very closely to see where it goes.”

(With assistance from Karolina Miziolek.)