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Irrespective of a rate hike or status quo, the Reserve Bank of India on Wednesday is set to change its policy stance to signal a rise in interest rates from here on.
Most experts are expecting a higher probability of key repo rate to remain unchanged at six percent, and a shift in stance from the current “neutral” to “withdrawal of accommodation” by the central bank’s Monetary Policy Committee (MPC).
Repo rate is the rate at which banks borrow from RBI for their short-term funding requirements.
Withdrawal of accommodation is when a reversal in the interest rate cycle towards a rate cut, to accommodate those wishing it, is ruled out.
The six-member MPC, headed by RBI Governor Urjit Patel, is meeting for three days starting Monday to deliberate on the second bi-monthly monetary policy review for 2018-19 and will announce the verdict on Wednesday, June 6.
“A policy rate hike is likely to be on hold and almost certain to change stance to tightening. A hike is not ruled out but a high chance of it being on hold. I would say a 70:30 ratio between hold and hike,” said Saugata Bhattacharya, Chief Economist at Axis Bank.
According to Bhattacharya, the voting pattern will be keenly watched. “…unlikely to be a split vote. If it's a hold, likely would be 2:4 and if it is a hike would 4:2 (RBI Governor’s final vote in favour of the decision).”
With most banks already increasing their interest rates on both deposits and lending front and a rise seen in inflation and bond yields, a hawkish tone is inevitable.
Moreover, in the minutes of the April MPC meeting, two of the six MPC members — RBI Deputy Governor Viral Acharya and Executive Director Michael D. Patra — have already decided to vote in favour of a 25 basis points (bps) hike.
One bp is a hundredth of a percentage point.
Also Read: RBI’s monetary policy committee to meet for 3 days in June instead of 2 days
Inflation, GDP and oil prices
India’s retail inflation for April was higher at 4.58 percent from March’s 4.28 percent due to rise in prices of miscellaneous items such as education, household goods, personal care items as well as petrol and diesel prices.
The gross domestic product (GDP) data released last week showed that the economy grew at 7.7 percent in the fourth quarter of 2017-18, beating analyst expectations. It should please policymakers.
Therefore, in order to control inflation amid satisfactory GDP growth numbers, the language will be more hawkish and the inflation forecast will be revised upwards, Bhattacharya added.
In its April review, the MPC noted that inflation in the first half of the current fiscal would be in the range of 4.7-5.1 percent and moderate to 4.4 percent in the second half, with risks on the upside. Although the monsoon is expected to be normal this year, there is a risk of a significant hike in the minimum support price, as announced in the Union budget, which could push inflation.
Further, crude prices have firmed up in recent months. Members of the Organisation of the Petroleum Exporting Countries (Opec) and Russia have indicated that production will be increased, but prices are unlikely to come down significantly.
Most experts believe that if the policy rate is on hold, it will be followed by rate hikes in the forthcoming meetings in August and October.
“I think there is an even chance of rate change in this or the next policy. US rates, its bond yields have gone up significantly, oil prices have gone higher and so that has created a situation that there is less liquidity in the system and hence bond yields here have gone up.”
The uncertainty in the global financial market has also increased since the last policy, with a tightening in financial condition resulting in an outflow by foreign portfolio investors. Moreover, the growing economic problems in the eurozone has added to the uncertainty.
A note by Kotak Economic research said: “We pencil in 50 bps of rate hike in FY2019 (earlier pause) possibly split between August and October. But we do believe that the MPC votes are likely to be evenly balanced in the June meeting thereby keeping the chances of a rate hike alive in June.”