Surging housing costs may lead to hike in rates
The stage seems set for the Reserve Bank of India to deliver another hike in interest rates. The reason—retail inflation, which accelerated to a fivemonth high. Thursday’s headline inflation number for the month of June will be scrutinised by the six-member monetary policy committee that will meet later this month and announce its decision August 1. The panel, which has been very vocal on the need to curb inflation, is sure to raise interest rates by 50 basis points in the next 12 months, pricing in swap markets show.
Analysts at HSBC Holdings and ANZ Banking Group are expecting a quarter percentage point increase in August, though a majority of economists in a Bloomberg Survey forecast the central bank to stand pat. The latest data, which shows underlying price pressures are surging, could prompt a few more analysts to change their call. Consumer prices climbed 5 per cent in June, the highest level since January. That compares with the 5.28 per cent median estimate in a Bloomberg survey of 43 economists and May’s 4.87 per cent pace.
“The core- CPI inflation hardened to 6.4 per cent in June, with a fairly broad-based uptrend in miscellaneous items as well as clothing and footwear,” said Aditi Nayar, principal economist at ICRA Ltd. This rise means there is a “high likelihood of a repo rate hike” in the August policy.
A combination of a weaker rupee, better growth prospects, narrowing output gap and higher assured prices for crops, along with costlier oil, are likely to put pressure on inflation in the coming months and underpin rate hike expectations.
The central bank expects oil averaging around $78 a barrel to stoke inflation by 30 basis points, complicating its job of keeping the gauge at the 4 per cent mid-point of its target band over the medium term. Policy makers have been expressing discomfort over rising price pressures and increased input costs, some of which is being passed on to consumers.
In June, the RBI raised rates for the first time since 2014 and revised its inflation forecast for the fiscal year 2019, with the second-half estimate revised to 4.7 per cent from 4.4 per cent.
Core inflation—which strips out volatile food and fuel prices and a risk flagged by some monetary panel members—has moved higher, making the RBI more watchful.