A customer counts Indian rupee banknotes at the Mayuresh Watches and Traders watch and mobile phone store in the Byculla area of Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Probability Of RBI Rate Hike Has Increased, Say Experts

The Reserve Bank of India is expected to maintain status quo on policy interest rates this financial year, but the probability of rate hike has increased, experts say.

According to domestic as well as foreign brokerage firms like Kotak Institutional Equities and Morgan Stanley, the minutes of the Reserve Bank of India’s monetary policy committee are “hawkish” and indicate a hike in key policy rates.

“While we continue to expect the MPC to maintain status quo in 2018-19, the probability of rate hike has increased after the minutes suggested that more members are inclined towards withdrawal of accommodation,” Kotak Economic Research said in a note.

The minutes of the April MPC meeting released by the RBI noted that Deputy Governor Viral Acharya favoured withdrawal of monetary accommodation in the next policy review meeting scheduled on June 4-5.

Also read: MPC Minutes: Split Set To Deepen As Viral Acharya Leans Towards Rate Hike

Meanwhile, Executive Director Michael Patra voted for an increase of 25 basis points in April itself, though the majority view of maintaining status quo prevailed.

Besides Patel, four other MPC members – Chetan Ghate, Pami Dua, Ravindra Dholakia and Acharya – had voted in favour of status quo in the repo rate.

The six-member MPC, headed by RBI Governor Urjit Patel, had left the benchmark repo rate unchanged for the third time in a row after deliberations on April 4-5, citing inflationary concerns.

But Morgan Stanley says the MPC might not tilt into a rate hike just yet.

Unless GDP growth and high-frequency indicators surprise strongly on the upside and hint at a stronger than-expected recovery between now and the next MPC meeting, we think that our base-case view of a rate hike in Q4 remains largely intact.
Morgan Stanley

Meanwhile, Bank of America Merill Lynch noted that though the RBI minutes indicate a hawkish tone, data suggests a rate cut in its August policy meet.

"We retain our call of Aug. 1 RBI rate cut, if rains are normal, with inflation peaking off. We track April inflation at 4.3 percent," it noted.

Also read: Bonds Slump in India After RBI Surprises With Hawkish Minutes