Inflation risk seen triggering 25 bps RBI rate hike on 1 August
Of the 15 economists surveyed by 'Mint', 12 expect RBI to raise its repo rate to 6.5% and only three expect a status quo at the 1 August MPC meeting
Mumbai: The Reserve Bank of India’s (RBI) monetary policy committee may raise policy rates by 25 basis points on Wednesday but is expected to maintain its neutral policy stance given the volatility in crude oil and food prices, economists say. Of the 15 economists surveyed by Mint, 12 expect RBI to raise its repo rate, the rate at which it lends to commercial banks, to 6.5%. Only three economists expect RBI to keep rates unchanged at 6.25%.
One basis point is one-hundredth of a percentage point.
Since the last RBI rate hike in June, food and retail inflation, measured by consumer price index (CPI), have surprised to the downside, while core inflation has accelerated. CPI quickened to 5% in June, slower than the 5.3% consensus estimate of economists, but faster than the 4.87% pace in May. Core CPI, excluding food and fuel, accelerated to 6.4% from 6.2% in May, adding to RBI’s concerns. While global crude prices have declined, it is still hovering above $70 per barrel, threatening further expansion of India’s current account deficit.
The previous RBI policy cited uncertainties around the implementation of minimum support price (MSP) as one of the factors that could stoke inflation. With the government announcing a double-digit increase in MSP, economists believe that its impact on inflation could be limited as much of it depends on its implementation. Economists believe that risks to the medium-term inflation target of 4% has increased, warranting a rate hike.
“With real rates less than MPC’s preferred range of 175 bps, we believe a hike will reaffirm its commitment towards inflation-targeting framework and play an important role in reducing risks to macroeconomic stability amid several global uncertainties,” said Anubhuti Sahay, senior economist at Standard Chartered Bank.
While a rate hike is almost unanimous, many economists believe RBI will maintain its neutral policy stance and wait to assess the impact of monsoon and fiscal developments before changing its stance.
Majority of economists expect one more rate hike before the end of the financial year. But some believe that RBI will pause as growth and inflation peak off in the second quarter.
“We don’t expect any more rate hike from the RBI post the anticipated hike in August. However, the RBI is likely to remain vigilant and reactive amid a multitude of moving parts that could have a bearing on inflation trajectory beyond FY19,” said Shubhada Rao, chief economist at Yes Bank.
In the June monetary policy, RBI increased the inflation forecast to support its decision to do a surprise rate hike. The average inflation for 2018-19 now stands at 4.8-4.9% in the first half and 4.7% in the second half. Economists expect a minor revision in inflation projection for the second half so as to factor in the impact of higher MSPs on food and generalised inflation, especially in the last quarter of FY19.
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