RBI may hike rates further as commodity inflation, global volatility remain concerns: Kotak Securities
Kotak Securities warns the RBI might implement rate hikes as commodity inflation and global volatility threaten the economy and the rupee.
The Reserve Bank of India (RBI) may be preparing for further interest rate hikes as the nation grapples with broad-based commodity inflation and intense global market volatility, according to experts at Kotak Securities.
In an exclusive discussion, Anindya Banerjee, Head of Commodities Research at Kotak Securities, highlighted that the central bank's recent shift from a neutral stance to "calibrated tightening" signals a hawkish outlook. This strategic move suggests that the regulator is bracing for more aggressive monetary tightening to combat rising costs.
Potential Rate Hikes on the Horizon
The timing and magnitude of the next move by the RBI remain the key questions for investors and policymakers alike. Banerjee noted that depending on how inflation and the broader economic landscape evolve, the central bank could take one of two paths in December:
- A gradual approach: A calibrated 25-basis-point increase.
- A sharper move: A more aggressive 50-basis-point hike if inflationary pressures intensify.
With consumer price inflation (CPI) projected to hover around the 6 per cent mark, the risk is being driven by the rising costs of energy and raw materials. These costs are no longer isolated; they are actively feeding into both agricultural production and industrial manufacturing, creating a ripple effect of broad-based commodity inflation.
The Crude Oil and Rupee Connection
Global energy markets remain a significant wildcard. Banerjee warned that persistently high oil prices could act as a drag on global demand and increase the likelihood of a worldwide economic slowdown. He anticipates that Brent crude prices could climb to the range of USD 110-115 per barrel by December.
The complexity of the oil market is being compounded by supply chain disruptions, rising freight costs, and increased insurance premiums. These factors mean the actual "landed cost" of crude is significantly higher than what is currently being reflected in futures markets.
While India maintains a slight cushion as a net refining surplus country, the pressure on the Indian rupee remains acute. The currency is currently caught in a squeeze caused by high US bond yields and a dominant US dollar. Banerjee pointed out a critical distinction regarding monetary policy:
"RBI policy rate is definitely not the tool to stabilise the currency... As long as oil, yields and the dollar index continue to stay elevated, it will push the rupee lower and USD/INR higher," Banerjee stated.
The data reflects this volatility. After seeing an inflow of USD 7 billion in July and August, foreign portfolio flows swung to an outflow of USD 8.6 billion by early October. If global pressures do not subside, the USD/INR pair could potentially weaken to the 97.5-98 level by the end of the year.
Gold: Festive Demand vs. Investment Trends
As the festive season approaches, the outlook for gold presents a divided picture. While Banerjee expects a boost in jewellery consumption due to seasonal trends, he anticipates that investment-driven demand—such as gold coins, bars, and Exchange-Traded Funds (ETFs)—may remain muted.
The primary headwind for gold prices is the elevated real yields in the US, which typically limits upward momentum. However, the ongoing depreciation of the rupee could act as a supporting factor for domestic gold prices, providing a complex landscape for investors to navigate.