Mumbai: One member of the Reserve Bank of India’s (RBI’s) rate-setting panel suggested starting the process of shifting the monetary policy stance from neutral to “withdrawal of accommodation", increasing the odds of a rate hike this year.
Noting the upside risks to inflation, Viral Acharya, RBI deputy governor, said he is likely to shift decisively to vote for a beginning of “withdrawal of accommodation" at the next Monetary Policy Committee (MPC) meeting in June.
“Reinforcement of inflation-targeting credibility that such a shift would signal is crucial in my view for prudent macroeconomic management, on both the domestic and external sector fronts," he said
According to Gaurav Kapur, chief economist at IndusInd Bank, a combination of risk factors, both on the demand and supply side, should play out for changing the monetary policy stance to restrictive from neutral. “Such a shift is unlikely in June because there may not be adequate information. However, going by the projected inflation path, probability of a rate hike in August has increased," he said.
Rupa Rege Nitsure, group chief economist at L&T Financial Services, said it will be prudent if MPC members wait to see firmer signs of sustainable growth before withdrawing the accommodation.
“After considering the major seasonal and structural factors, we do not see inflation emerging as a major macro risk until oil prices cross $75 level. Muted consumption demand in urban belts and curtailed lending capacity of PSBs to MSMEs may most probably throw a negative surprise on the growth front," she said.
On 5 April, MPC decided to keep rates on hold with 5 of the 6 members voting in favour of the decision. Michael Patra, executive director of RBI, called for a 25 basis points hike in the repo rate, the rate at which the central bank infuses liquidity into the banking system.
In the policy, RBI said there are several uncertainties surrounding the baseline inflation path. This included impact of the revised formula for minimum support prices (MSP) and staggered implementation of house rent allowance (HRA), volatility in crude oil prices, and rise in input prices by firms. It had also said that there are risks in case of further fiscal slippage and should the monsoon turn deficient.
The latest data shows retail inflation decelerated for the fourth consecutive month to 4.28% in March on the back of softening food prices.