Citi economists have lowered their expectations for interest rate hikes in India, citing the recently struck US-Iran deal that is expected to cool oil prices and, in turn, inflation. The revised forecast removes one of the key pressures that had been pushing the Reserve Bank of India toward tighter monetary policy.
Why the forecast changed
The US-Iran agreement, announced last week, is widely seen as a step toward easing global crude supply constraints. For India, the world's third-largest oil consumer, cheaper crude directly lowers import costs and reduces the inflation that had been running above the central bank's comfort zone. Citi's economists now believe the RBI will not need to raise rates as aggressively as previously thought.
Oil prices and inflation
India imports roughly 85% of its oil. Every $10 drop in crude prices cuts the country's import bill by about $15 billion and shaves off roughly 0.3 percentage points from consumer inflation. The US-Iran deal could push Brent crude toward $70 per barrel, down from recent highs above $80. That takes significant heat off the RBI, which had been signaling further rate increases to contain price pressures.
A slower pace of rate hikes would be a relief for borrowers and businesses. India's economy is growing at a solid clip, but high borrowing costs have been a concern for corporate investment and consumption. The RBI's next policy meeting is scheduled for early August. Markets now expect a smaller hike, possibly a pause, rather than the 25 or 50 basis points that had been priced in before the oil news broke.
Citi's revision doesn't mean the inflation fight is over. Food prices remain sticky, and the monsoon season could introduce new shocks. But for now, the oil deal has bought the central bank some breathing room.
