Even as the Reserve Bank of India (RBI) maintained a neutral stance despite raising the repo rates by 25 basis points from 6 per cent to 6.25 per cent on Wednesday, economists and large brokerage houses feel that this may not be the last rate hike in this financial year and the central bank may go for at least one more rate hike. Rising crude oil price along with domestic price pressures such as expected MSP hikes are likely to pose a challenge for RBI, which has the primary task of keeping inflation under control.
Abheek Barua, chief economist at HDFC Bank, while stating that the RBI policy was sensible and cautious response to the risks that have unfolded since last meeting said, “This is not likely to be end of the hike cycle as domestic price risks such as MSP hikes and firm global commodity prices would warrant further monetary action.”
D K Joshi, chief economist at Crisil, said that in a volatile environment like this, it’s tough to predict. “After the previous policy meeting many said that there will be a long pause, however that has changed now,” said Joshi. He said that it will depend upon the movement of crude oil prices and hike in MSPs. “It is not a stable environment. While I don’t see any possibility of a rate cut, the chances of rate hike are more than a pause. Everything will depend upon GDP data and the inflation numbers,” Joshi added.
Global financial services firm UBS said that it expects “one more 25bps hike by the MPC in FY19” in the August policy. In its report released after the RBI rate hike announcement, UBS noted, “We expect CPI inflation to average about 5 per cent YoY in FY19 based on global crude oil prices to average $75/bbl in FY19. We expect refined core inflation to stay around 5.5-6 per cent in FY19, indicating demand-push inflation and rising input price pressure.”
Nomura also projected that RBI may raise rates by another 25 bps in its next policy meeting in August 2018 and then maintain a status quo for the rest of the year. Nomura also said it expects recent tightening of financial conditions and higher oil prices to slow growth in H2 FY19.
There are, however, some other major research houses that see a more aggressive rate hike in this year. While Citi India expects another rate hike this year in October, Morgan Stanley expects rate hikes to be front-loaded. “Total quantum of rate hikes will remain at 75 bps for this cycle,” said Morgan Stanley. Analysts at JP Morgan opined that the recent tightening of global financial conditions has made “the timing between today and the August review a toss-up.”
On the other hand, Indranil Sen Gupta of BofA-ML said rates will be on a long hold now. “If the monsoon is normal, we believe the RBI’s MPC will be on a long hold… Why? Inflation should peak at 5.4 per cent in June as base effects fade, especially if rains are 97 per cent of normal, as the Met forecasts. While oil is a worry, our strategists expect it to peak at $73/bbl by March,” said Gupta in his report.