MPC Likely To Hold Rates In 2018. Here’s What Could Alter That.

The Reserve Bank of India will likely hold policy rates at least for the first half of 2018, but rising inflation could prompt an earlier-than-expected hike.

That’s the word from most brokerages after the monetary policy committee yesterday maintained a status quo on the key benchmark rates, while highlighting upside risks to inflation, such as global oil prices, fiscal slippage and a hike in minimum support prices for kharif crops.

As things stand, though, the central bank is unlikely to hike rates anytime soon, according to economists and money market experts.

Nomura:

• Expect benchmark rates to be on hold through financial year 2018.
• A change in RBI policy is likely only if inflation is significantly above or below the inflation projection of nearly 4.5 percent, by the end of the next financial year.
• There is a risk of more hawkish rhetoric from the RBI in the second quarter when growth and inflation should be higher.
• Food price inflation may rise as government's inflation policies have become more producer-focused than consumer-focused.
• Monetary policy was less hawkish than the market expectations.
• RBI is growing increasingly comfortable on the growth outlook (recovery), but uncomfortable with the inflation outlook.

Morgan Stanley

• Maintain the view that rates will be hiked by the fourth quarter of the current financial year but the risks are tilting towards an earlier-than-expected rate hike.
• Inflation trajectory will hold the key towards determining when the central bank would likely hike interest rates.
• Upside risks to inflation hint towards an earlier than expected rate hike.

Also Read: RBI Monetary Policy: Patel’s Smile Hides A Tough Message For New Delhi

Macquarie

• Expect the RBI to be on pause in 2018 as it balances between a nascent growth recovery and a volatile inflation trajectory.
• The MPC’s policy state is neutral and not hawkish.
• If inflation inches higher than RBI's expectation in the second half of the next fiscal, the central bank will be forced to hike rates.

IDFC

• RBI is on an extended pause with respect to the trajectory of rates and would react as and when inflation data changes.
• Although the central bank will avoid hasty decisions even as inflation imprints in the first quarter of the upcoming fiscal could be closer to the 6 percent mark.
• RBI did not want to upset the growth apple-cart by signalling firmer rates, that could have aggravated already increasing borrowing costs.
• 10-year benchmark yield can dip below 7.50 percent if the next inflation print is lower than the 5 percent mark helped also by G-sec supplies coming to an end.
• This is unlikely to immediately alter IDFC's target range of 7.5-8 percent for financial year 2019 as supplies hit the market starting April 2018.

Kotak Securities

• Average CPI inflation in the next fiscal will be at 4.9 percent, in the 4.7-5.9 percent range in the first half and at 4.1-4.8 percent in the second half.
• MPC will maintain status quo on policy rates at least in the first half of the ongoing calendar year.
• Subdued capacity utilisation and nascent recovery may hold RBI from hiking rates in the foreseeable future.

Edelweiss

• Expect inflation to move higher but remain below RBI's forecast.
• Do not expect a rate hike in the near term as inflation is within RBI’s target band.

(Read more on what economists told BloombergQuint on RBI’s decision here)