RBI monetary policy: Economists see rate hike latest by August

The least the analysts, or the markets, expect is any discrepancy between the policy statement of the RBI and the subsequent minutes

A rate hike is certain, and the August policy could be the best time for it, but June too looks good, say analysts.

Nine out of the 10 economists polled by Business Standard expect the monetary policy committee (MPC) to favour rates to harden by August. Four of them expect the repo rate to become 6.25 per cent from 6 per cent now in June itself.

Indranil Sengupta, of Bank of America Merrill Lynch, guns for a rate cut in October. 

The retail inflation print in April was at 4.58 per cent against 4.28 per cent in March and 2.99 per cent in April last year. While it is still within the ambit of the Reserve Bank of India’s (RBI’s) forecast, the core inflation rate showed a much sharper jump, at 6.07 per cent in April, from 5.27 per cent in March, noted Gaurav Kapur, chief economist of IndusInd Bank. “If they have to hike, I see no material reason why they should not do so now instead of waiting for August,” Kapur said. He, along with three other economists, expects the MPC to hike policy rates by at least 25 basis points during the June 4-6 policy. 

If, in case, the RBI exercises pause, an August hike seems to be a certainty. “A likely date for a rate hike is August since the inflation rate will start falling after June or July. With this softening, the optics will be relatively unfavourable for a hike, without a conviction that inflation will remain elevated in FY20,” said Saugata Bhattacharya, chief economist, Axis Bank.

The certainty of the economists owes itself partly to the fact that the minutes of the April policy showed that Viral Acharya, RBI deputy governor and head of monetary policy department, cautioned that he would be willing to vote for a “withdrawal of monetary accommodation” in June. 

RBI Executive Director Michael Patra is advocating a hike for some time, and with Acharya also going for it, two of the three RBI members in the MPC (excluding Governor Urjit Patel) will be favouring a hike. Analysts say external member Chetan Ghate will likely say something in the line of Acharya. “It is likely that one more or more MPC members will signal a withdrawal of accommodation, even while voting for a pause, in line with an MPC strategy preparing markets for an imminent hike,” Bhattacharya said.

The analysts would be awaiting a clear signal from the RBI about the trajectory of rates. And the least they, or the markets, expect is any discrepancy between the policy statement and the subsequent minutes. In the April policy, the statements were dovish, whereas the minutes showed remarkable hawkishness from members, including Acharya.

“We will be keenly watching divergence, if any between MPC minutes and monetary policy signaling. A large variance is likely to raise the signal-to-noise ratio further from current levels, thus might confuse the markets about future policy actions,” said Soumyakanti Ghosh, group chief economist of State Bank of India. Ghosh expects a pause as data print was still not sufficiently compelling for any change.

Analysts also say that more than the rates, other issues such as exchange rate volatility, outflow of portfolio money and macroeconomic issues should get precedence, say analysts.

“One of things I am concerned is the volatility and the run on the exchange rate that we have seen. We are looking at this policy as a sort of mid-crisis, or a kind of pre-emptive policy against the pressures on the rupee. While oil prices might have moderated there are a lot of other factors which have turned negative. The RBI should recognise this front and make a clear case for hiking the interest rate and prevent a kind of run against the currency,” said Abheek Barua, chief economist of HDFC Bank. “This is the time the RBI should focus more macroeconomic stability, rather than going by inflationary concerns alone. If they increase the rate by about 25 bps that will be a good signal to the market, as they will have to front-load the rate hike,” said Rupa Rege Nitsure, group chief economist of L&T Finance Holdings, adding RBI must address pressure on the rupee.

Economists say a rate hike, or at least a clear signal of a rate hike is a necessity for the RBI as the markets are reeling under uncertainties and have almost discounted what the RBI says or does in the policy statements. It is a kind of credibility issue for the central bank.

The bond yields have moved up from 6.5 per cent in end August last year to about 7.8 per cent now, even when the central bank has paused all this while. “The way the market has moved and the way they (RBI) have moved, they have fallen behind the curve and they should catch up as soon as possible,” said Barua of HDFC Bank.