Urjit Patel, governor of the Reserve Bank of India (RBI), attends a news conference in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

RBI Monetary Policy: What Experts Make Of MPC’s Second Straight Rate Hike

India’s Monetary Policy Committee today raised the benchmark interest rates for the second straight time this year amid inflation concerns and global trade tensions.

The committee hiked the repo and reverse repo rates by 25 basis points to 6.5 percent and 6.25 percent, respectively, while retaining a ‘neutral’ policy stance. The decision was in line with expectations, as 40 of the 53 economists polled by Bloomberg had forecast a rate hike at the August policy meeting.

The MPC had hiked rates for the first time in four years in June to quell price pressures and bring inflation closer to the mid-point of the committee’s target of 4 (+/- 2 percent).

Here’s what economists and experts made of the RBI’s decision:

What About Growth?

The MPC expects inflation at 4.6 percent in the second quarter and at 4.8 percent in the second half on the current financial year ending March 2019, noting that risks to these forecasts are evenly balanced.

“They are still quite hesitant to say that inflation would come down to the mid-point, which I think is a very fair assessment,” said Sanjay Mathur, chief economist at ANZ.

The committee maintained its GDP growth projection at 7.4 percent for the current year. “The issue is growth,” Mathur said. The slowing global economy, according to him, may have a bearing on India’s growth next year.

The investment could potentially improve and we expect a full-blown investment cycle, but it’s still premature given that the banking channel is impacted by the non-performing loans.
Sanjay Mathur, Chief Economist, ANZ

Also read: India Monetary Policy: MPC Hikes Rates For Second Straight Time

Gautam Sinha Roy, senior vice-president at Motilal Oswal AMC, shared similar concerns. “The key question right now is what is the direction going ahead.”

We’ve seen a base effect play out hence we’ve seen a very high core CPI trend last month. The sense is that, other things remaining the same, inflation should have peaked out for the time being. And so should have the rate cycle.
Gautam Sinha Roy, Senior Vice-President, Motilal Oswal AMC

We should not expect any rate hikes on the basis of the inflation trajectory, Roy said. “Crude prices have also been benign after its rally last week,” he said. “With MSP (minimum support price) hikes, we are yet to see how much procurement happens on the increased prices. So as it stands, it looks like inflation and the yield trajectory has peaked out for now.”

Still Neutral?

The MPC estimated inflation at 5 percent in the first quarter of the next financial year.

“The RBI was right to ‘mark-up’ their inflation forecast for the next year,” R Sivakumar, head-fixed income at Axis Mutual Fund, said. But he wasn’t much convinced with the ‘neutral’ stance.

While the market reaction has been very muted and the 10-year yield has barely budged, I still feel that two back-to-back rate hikes mean that the RBI is not in a neutral stance. And given the chance they will want to hike a couple of times more over the next few months.
R Sivakumar, Head-Fixed Income, Axis Mutual Fund

The RBI maintained a ‘neutral’ stance against the backdrop of balanced risks, Governor Urjit Patel said in the press conference. “There is also a fair bit of uncertainty around the CPI prints,” he said. “That’s why we would need to monitor the domestic inflation outlook in the coming months.”

Mismatch On Inflation Projections

While the MPC’s decision was in line with expectations, Tanvee Gupta Jain, India Economist at UBS, is “curious” that the CPI inflation forecast for the ongoing financial year hasn’t changed much.

“I think the RBI mostly felt that the food price inflation due to the hike in minimum support prices would be felt in the first quarter of the next financial year,” Jain said. “According to our estimates, the headline inflation would be above 5 percent even in the last quarter of the ongoing financial year.”

Status Quo On The Cards

After two consecutive rate hikes in June and August, CRISIL Research expects the RBI to maintain a status quo unless inflation peaks higher than expected.

Even though the RBI continues to maintain a ‘Neutral’ stance, we believe it will be on hold for now unless higher-than-anticipated upside risks to inflation from crude oil, stronger demand conditions and food prices materialise. Upcoming domestic and global data hold the key.
Dharmakirti Joshi, Chief Economist, CRISIL Research

Even though crude oil prices have stabilised, the future remains uncertain, Joshi said. Food inflation faces upside risks from higher minimum support prices and pay commission hikes at the state level.

Trade War Risks

HDFC Bank doesn’t rule out another rate hike due to upside risks to inflation. But said the RBI may opt for a prolonged pause because of looming trade war tensions.

Abheek Barua, chief economist at HDFC Bank, expects bond yields to continue rising as another rate hike is still on the table. He also cautioned against the inflation readings in September and October.