The Reserve Bank of India (RBI) is expected to signal a shift from the current “neutral” stance to “withdrawal of accommodation” at the June 6 monetary policy committee (MPC) followed by rate hikes in the forthcoming meetings in August and October, according to analysts.
While the MPC is likely to maintain the repo rate at 6 per cent on June 6, there’s a 40 per cent probability that the MPC will pre-emptively hike rates by 25 bps in the June policy meeting, analysts said. The tone of the policy statement is likely to remain hawkish with bond yields remaining strong, interest rates in the banking system showing upward movement and foreign investors pulling out over Rs 45,000 crore in April and May. The minutes of the April meeting suggest that two of the six MPC members — RBI Deputy Governor Viral Acharya and Executive Director Michael Patra — have already decided to vote in favour of a 25 bps hike.
“The June policy decision is a close call; we assign a 40 per cent probability to the MPC voting for a 25 bps hike in June itself, followed by another 25 bps hike in August,” said a Nomura Global Economics report. “We expect the tone of the policy statement to remain hawkish. The minutes of the April meeting suggest that two of the six MPC members have already decided to vote in favour of a 25 bps hike,” said Tanvee Gupta Jain and Rohit Arora of UBS Securities India.
Other factors that could influence the RBI are capital outflows and rising bond yields. Simultaneously, banks have started hiking deposit and lending rates. State Bank of India, HDFC and other banks had last week raised prime lending rates by 10 basis points. Foreign investors have pulled out Rs 29,680 crore from the debt market and Rs 15,500 crore from the equity market in April and May which, in turn, has affected rupee’s value against dollar. Hit by bad loans and losses, banks have lost their appetite for government bonds.
Kotak Research and other analysts have said inflation uncertainty appears to have increased over the past few months. The FY19 consumer inflation is expected to average 4.7 per cent against 3.6 per cent in FY18. The upside risks to the inflation trajectory could impinge on RBI’s inflation targeting mandate. Sustained crude price increases could impact the CPI trajectory by 30-50bps in FY19. “More importantly, we are cautious of the imminent MSP increases (which if implemented as outlined in the Budget could impact by 50-80 bps). However, upside risks will be capped if MSP increases turn out to be not materially different from the recent trends which could give room to the RBI to remain on a pause,” Kotak said
Brent crude oil prices are up 48 per cent year-on-year, the 11th-largest oil spike in 70 years. “In our baseline forecasts (Brent future curve), in which the oil price gradually retreats from $ 79 per barrel currently to $72 per barrel towards end-2019, we expect the MPC to hike rates by 50 bps in the rest of FY19 starting from its August meeting. However, a crude oil shock (towards $ 100/bbl) and/or Indian rupee weakness higher than 70 to the US dollar may cause the rate hike cycle to start sooner (June) and be more aggressive (at least another 75 bps from now),” UBS said.
Analysts see scope of a shallow rate hike cycle which balances emerging price pressures with a nascent cyclical economic recovery. “Our call is influenced by persistent shocks of higher fuel prices and weaker rupee along with incipient risk of higher-than-usual MSP increases. We pencil in 50 bps of rate hike (August and October) and expect June policy to strongly signal the same. However, if MSP increases are in line with recent trends, the RBI could have some space to maintain status quo,” Kotak Research said.
The watch-list of MPC members is long; they will monitor announcements of hikes in minimum support prices (MSP) for the summer (kharif) crops and changes in procurement policy, whether global oil prices remain at high levels, the outturn of monsoons, risk of fiscal slippages in the run-up to the 2019 general elections, and household inflation expectations, which, at 8.2 per cent as of March 2018, were the highest since September 2016, when the policy rate was 50 bps higher.
Aashna Dodhia, Economist at IHS Markit, said that in efforts to contain inflation and maintain financial stability, it is likely that “the RBI will raise interest rates over the summer”. In its first bi-monthly monetary policy for 2018-19 in April, the RBI had left the repo rate unchanged at 6 per cent. The MPC maintained the status quo for the fourth consecutive time since August last year.