Samiran Chakraborty, Chief Economist at Citi India, believes the Reserve Bank of India (RBI) is unlikely to consider a rate hike in its June policy despite rising inflation concerns triggered by higher crude oil prices and weather-related risks. He says liquidity conditions remain comfortable and headline inflation is still below the RBI’s 4% target, giving the central bank room to look through temporary price shocks.However, Chakraborty cautions that risks could rise if core inflation stays above 4.5% on a sustained basis. He adds that markets are increasingly pricing in not only inflation pressures, but also concerns around fiscal slippage, higher global bond yields and the possibility of RBI eventually stepping in to defend the rupee if external pressures intensify.This is an edited transcript of the interview.Q: India’s CPI inflation for April came in at a benign 3.48%, but Wholesale Price Index (WPI) inflation jumped sharply to 8.3% from 3.8% in March. The government has also raised petrol and diesel prices. How do you expect inflation to pan out from here?
A: Our baseline forecast of 4.6% average CPI inflation for FY27 is based on a few assumptions. First, we assumed a ₹5 petrol and diesel price hike, which has almost happened already.The second key assumption is around the monsoon. We have assumed a normal monsoon in the baseline, but if El Niño conditions lead to a deficient monsoon, there could be a 40-basis-point upside risk to our 4.6% CPI forecast. In such years, it’s usually pulses and vegetables — rather than food grains — that see sharp price increases.The third issue is wholesale inflation. We are less concerned about headline WPI and more worried about core WPI excluding oil and food. That component rose sharply in April with a 1.1% month-on-month increase. Historically, such pressures feed into CPI with a lag.Finally, the most difficult factor is inflation expectations. If these inflationary pressures begin affecting expectations, they can start impacting headline inflation more broadly. Based on current assumptions, we still project 4.6%, but with upside risks.Q: Bond yields have already risen sharply. Do you expect a rate hike this year? Where do you see yields headed over the next few months?A: It’s probably too early for the Reserve Bank of India (RBI) to think about a rate hike in June because liquidity remains plentiful and there are no signals of tightening yet. Headline inflation is still below the RBI’s 4% target, so there’s no immediate urgency.In the April policy, RBI clearly indicated that it would place greater emphasis on core inflation in the context of energy and weather shocks. That means the central bank could look through temporary increases in headline inflation.Also Read | Fed caught between stagflation and reflation, says BofAThe risk of rate hikes will rise only if core inflation stays above 4.5% on a sustained basis.Having said that, markets are pricing not just inflation risks, but also the possibility that the RBI may eventually defend the currency through rate hikes. We still think India is far from a 2013-style macro situation that would warrant such action.Apart from inflation, markets are also pricing concerns around fiscal pressures, additional borrowing and rising global bond yields.Q: At 7.12%, have bond yields already priced in all the bad news?A: There’s a bit of a dichotomy. Swap markets seem to have priced in much more bad news than bond yields.We still don’t know the size of the RBI dividend, whether that could offset fiscal slippage, or how long the conflict and inflationary pressures will last. So, there’s still considerable uncertainty ahead.When I look at swap rates, they seem to have already priced in substantial rate hikes over the next year, which would surprise us if it actually happens.Q: Next week, we get the January-March gross domestic product (GDP) numbers. More importantly, how do you see 2026-27 (FY27) growth shaping up?A: The bigger question is not the quarterly GDP number, but how much FY27 growth will be affected by the West Asia crisis.So far, the government has been careful not to hurt growth through policy actions. But now we are moving into a phase where actions like fuel price hikes will start creating knock-on effects on growth.For example, a ₹5 increase in petrol prices mechanically forces consumers to cut expenditure on other items by roughly 0.2% of GDP.There will also be pressure through the petrochemical chain and downstream industries, along with possible disruptions in maritime trade, exports and remittances from the Middle East.Taking all these together, we have lowered our FY27 GDP growth forecast by 50 basis points from 7.1% to 6.6% for now. Much depends on how quickly the conflict resolves and whether oil prices ease.Q: The rupee has weakened sharply. How do you see the balance of payments and current account evolving?A: India was already facing balance of payments (BoP) pressures before the West Asia conflict because of challenges on the capital account side.The current account had actually remained relatively benign because services exports were strong. But now we have raised our current account deficit forecast from 0.6% of GDP to 2% of GDP.Also Read | AI boom is far from over, says Citi’s Drew PettitGiven existing capital account challenges and a wider current account deficit, we now forecast a $50 billion balance of payments deficit for FY27, which is quite significant in the Indian context.What is difficult to model right now is the extent of policy intervention that may come later.Q: What policy measures could help stabilise the rupee?A: Measures on the current account side are more difficult because the shock is largely price-driven due to oil. Yes, there can be tweaks to gold or electronics import duties, but the bigger challenge is on the capital account side.The dilemma is that encouraging inflows takes time, while capital controls on outflows have an immediate impact but may hurt investor sentiment.Some measures could still bring lumpy inflows — for example, inclusion in another global bond index, or temporary incentives for Indian companies and banks to borrow overseas and swap funds into rupees.But the situation today is very different from 2013 because global interest rates are much higher. That makes 2013-style foreign currency non-resident (FCNR) deposit schemes harder to replicate.Watch the full conversation hereQ: Do you think India could get included in the Bloomberg bond index in June?A: Some of the measures being discussed, such as reducing withholding taxes for foreign debt investors, could help enable bond index inclusion.In our view, implementing whatever is necessary would be a good idea because this crisis has shown that bond inflows are much stickier than equity flows.Since the conflict began, India has seen barely $1 billion of bond outflows compared with more than $20 billion of equity outflows.
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