RBI likely to maintain status quo at meeting, raise rates in August

Reserve Bank of India’s (RBI) monetary policy committee (MPC) is likely to keep policy rates unchanged on Wednesday, but may raise them at its next meeting in August, say economists.

Of the 15 economists surveyed by Mint, 11 expect the central bank to keep the repo rate—the rate at which the central bank infuses liquidity in the banking system—unchanged at 6%. Only four economists expect RBI to raise rates by 25 basis points (bps).

“Although the headline and the core CPI (consumer price index) inflation for April 2018 revealed negative surprises, an immediate rate hike may be premature given the lack of clarity on factors like the 2018 monsoon, minimum support price (MSP) and fiscal risks,”said Naresh Takkar, MD and group CEO, ICRA. “However, the expected rebound in the average CPI inflation for FY2019, in conjunction with the higher-than-anticipated GDP expansion in Q4 FY2018, suggests that a back-ended rate hike cannot be ruled out, which is likely to be reflected in the tone of the policy document.”

Since the last policy, consumer price inflation has accelerated from 4.4% in February to 4.6% in April, above the central bank’s target. Economists expect all MPC members to concur with RBI deputy governor Viral Acharya’s view in the last policy to shift decisively to vote for a beginning of “withdrawal of accommodation”.

“Some of the risks highlighted by MPC in the last policy have also come to the fore such as substantial rise in global crude oil prices, accompanied by a depreciation of the Indian rupee,” said Takkar.

That said, some economists believe that the central bank will be pre-emptive with a rate hike in June. Inflation outlook has further worsened, with crude oil prices touching a four-year high in a short span of two months, along with a weaker Indian rupee. Also, with growth accelerating to 7.7% in the fourth quarter of fiscal 2018, calls for raising interest rates have become louder.

MUMBAI: