Broadening inflation, robust growth, global hikes build case for India RBI tightening
The RBI is under growing pressure to raise rates in October as inflation broadens across the economy, growth remains strong and global central banks tighten policy. A Reuters poll shows most economists expect a 25-basis-point hike to 5.50%, while markets are already pricing in further increases over the next year.
In a recent research report, BNP Paribas has warned that rising oil prices and inflation could pose significant challenges to India's economic growth in the coming months. The brokerage noted that higher crude oil prices and commodity inflation are already weighing on consumption, rural activity, and industrial momentum.
Brent crude oil prices have surged above $100 per barrel, and the Reserve Bank of India now has limited room to keep interest rates unchanged, according to the report. While India's macroeconomic indicators have remained resilient, supported by strong credit growth, auto sales, improving employment figures, and substantial food-grain stocks, recent high-frequency data signals a moderation in several key areas.
The Manufacturing Purchasing Managers' Index (PMI) has hit its lowest level since August 2021, with declines in new orders and steel production. Industrial production growth has also decelerated month-on-month. In the services sector, airline passenger traffic, FASTag payments, and cargo volumes have weakened, while rural activity has been affected by a monsoon deficit, rising food inflation, and lower crop sowing.
Inflation has climbed to 4.8% year-on-year in August, the highest level since January 2025, and has remained above 4% for three consecutive months. Core inflation has risen due to higher metal prices. BNP Paribas anticipates that the recent increase in oil prices will exert additional pressure on inflation, potentially reversing the recent moderation in inflation expectations.
The brokerage expects India's second-quarter growth to be at 4.7%, aligning with the Bloomberg consensus. Despite these risks, strong bank credit growth and ongoing government grain procurement efforts provide some support to the economy.
Written by urgent.news from The Economic Times - Economy's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
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- Rising oil prices, inflation to create headwinds for India's economic growth: BNP Paribas economictimes.indiatimes.com
