Await rate hikes, era of cuts may be over – The Hindu–21.05.2018

Inflation may spur shift in RBI stance

While the market is, in general, expecting yet another pause from the Reserve Bank of India when it reviews monetary policy in the first week of June, there is growing expectation in some quarters that the central bank would sound more hawkish and set the stage for interest rate increases in subsequent meetings.

This is mainly due to the uptick in retail inflation, which accelerated to 4.58% in April, spurred by a rise in fuel prices. International crude price has further hardened and is now hovering about $80 per barrel.

In a note to clients, Goldman Sachs said while it expected RBI to maintain a pause in the June policy meeting, the tone will be hawkish, and listed inflation concerns among the reasons. “Headline inflation has bottomed and will likely rise over the coming months,” the note said.

Temporary moderation

“We think the moderation in inflation that we saw in Q1 was likely temporary and continue to expect headline inflation to rise back up to the 5% y-o-y mark in the next two months and beyond 5.5% y-o-y in Q3 — a trend that will likely warrant a more hawkish RBI.”

RBI has a medium-term mandate to contain consumer price index-based inflation at 4%, within a band of +/- 2 percentage points.

If the central bank holds rates in June, it would be the fifth successive meeting at which status quo would be maintained. The last revision was in August 2017 when RBI lowered the rate 25 basis points to 6%.

Economists at HSBC expect two rate hikes in the August and October meetings and a pause thereafter, a change from their earlier expectation of a continued pause. “We believe… a confluence of global and local factors warrant rate hikes in 2018,” the HSBC report said.

“Globally, the Fed is raising rates, dollar liquidity is likely to tighten and oil is on the rise. In the domestic economy, a closing output gap, higher oil prices, weaker rupee and higher agriculture Minimum Support Prices are likely to push inflation up in FY19.”

RBI Deputy Governor Viral Acharya, at the last policy meeting, had said he was likely to vote for ‘withdrawal of accommodative’ stance in June. RBI has a neutral stance, meaning, interest rates can move either way. Withdrawal of accommodation means rates will move only upward.

In a report, “Rate hike fears are unwarranted”, SBI’s chief economist, Soumya Kanti Ghosh argued inflation numbers for June were to peak at 5% or higher, and this number would be available to RBI for the August policy. “However, from July…, inflation will begin its downward trajectory and that number will only be available in the September policy… it is… up to RBI… to either see through the base effect or be guided by the June inflation number,” the report said.

via Await rate hikes, era of cuts may be over – The Hindu

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