MUMBAI (Reuters) - The Reserve Bank of India could raise interest rates by 50 basis points at its upcoming policy review, thanks to stubbornly high inflation and the pace at which major global central banks are hiking rates, Morgan Stanley said.
"We were earlier expecting a 35 bps increase, however, sticky inflation and continued hawkish stance of DM (developed market) central banks warrant continued front-loading of rate hikes in our view," Upasana Chachra, chief India economist at Morgan Stanley, said in a note on Friday.
In the RBI's monthly bulletin released late Friday, the Indian central bank said it will have to front-load its monetary policy to fight high inflation and shield medium-term growth.
Inflation in India has remained above the RBI's tolerance level of 6% since January.
Risks to the inflation outlook are skewed upwards due to the uncertainty around changes in global commodity prices and the possibility of imported inflation if the exchange rate weakens, Chachra pointed out.
Despite revising their rate projection for the Sept. 30 RBI decision, Morgan Stanley kept its terminal rate outlook unchanged at 6.50% but acknowledged that the risks were skewed towards an increase.
"The external environment remains challenging ... with a stronger dollar and continued hawkish response from DM central banks," Chachra said.
The U.S. Federal Reserve this week is tipped to raise rates by 75 bps for the third straight time. There is an outside chance that it may even raise it up to 100 bps. Meanwhile, the European Central Bank, earlier this month, took the more hawkish option and hiked rates by 75 bps.
The dollar index is hovering at around 110, itshighest level in 20 years.
(Reporting by Nimesh Vora; Editing by Dhanya Ann Thoppil)