Hike or pause? It'll be a tough monetary policy call for MPC: BS poll

The six-member Monetary Policy Committee (MPC), headed by RBI Governor Urjit Patel, will have a tough call to make on whether to hike rates or not at its three-day meeting commencing Monday. The meeting’s outcome will be announced on Wednesday, August 1.

A policy poll of 15 economists and bankers by Business Standard showed six participants expected a rate hike, whereas nine expected a pause. 

A data-dependent Reserve Bank of India (RBI) will look at three critical factors — inflation, growth, and what might happen on the currency front if China devalues its currency even more. If competitive pressures depreciate the rupee, and the import bill rises, the central bank might be forced to hike rates to stave off pressures on the currency. However, the logic for a rate hike could be much more fundamental.

“The core inflation has risen by almost 1 percentage point in the past six months and there are signs that a demand-pull pressure on inflation is gaining strength,” said Gaurav Kapur, chief economist at IndusInd Bank. The June inflation came at 5 per cent, but the core inflation (inflation excluding food and fuel) was 6.4 per cent. One more factor that could prompt the central bank to hike rates is that, between the last monetary policy in June and now, the US Federal Reserve has changed its guidance from one hike to two hikes. Although the RBI maintains its policies are independent of the US Fed, that is unlikely the case. Besides, growth is also showing signs of a pick-up. 

“We expect two more increases of 25 bps by the RBI in this series of rate increases - the first of which will be delivered in August. There is no reason, however, to change the stance from ‘neutral’ as there continues to be significant uncertainties regarding the direction of inflation. Oil, currency and MSP implementation remain uncertain, but the RBI needs to remain cautious and ahead of the curve with inflation expectations having jumped in the last survey,” said Indranil Pan, chief economist at IDFC Bank. According to Rupa Rege Nitsure, group chief economist, L&T Finance group, all MPC members will vote for a 25 bps rate hike, but two members could vote for changing the stance from neutral to hawkish.

“Inflation risks remain elevated but growth trajectory has become uncertain. The best course will be to raise the repo rate by 25 bps but keep the stance at neutral,” Nitsure said.

Rajeev Ahuja, executive director at RBL Bank, said, “We expect the RBI to hike the repo rate by 25 bps on the back of elevated crude prices, higher minimum support prices (MSPs) of major kharif crops and consistently high core CPI.” Participants who thought a pause would be justified at this point acknowledged it was a close call.

“A heuristic approach of another hike to tackle currency and inflation is not the solution. Rather the MPC is likely to stay hold with cautious signal, backed by the buffer it has created by hiking 25 bps and maintaining neutral stance,” said Saumyajit Niyogi, associate director of India Ratings and Research. “In terms of the global situation, there was the possibility of an extreme scenario panning out when the RBI decided to hike the rate last time. Things are a bit benign now with oil prices stabilising. While for the rupee, the worst of the battering is over,” said Abheek Barua, chief economist at HDFC Bank.

“The RBI will wait and watch given its neutral stance. The only concern is the core inflation. But since they have done one hike this year, we only see a possibility of them doing another hike down the year. Perhaps it won't be now,” Barua added.

C V R Rajendran, managing director and chief executive of Catholic Syrian Bank, said that with good monsoon, the food inflation would be under control. “Only worrying factor is high crude oil prices, which have corrected to some extent. So the RBI is unlikely to hike policy rates next week.”