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Economists differed on what the RBI would do next, based on the release of the monetary policy committee’s minutes of its meeting earlier this month. The RBI had hiked its key interest rate, the repo rate, by 25 bps to 6.25 per cent, the first time in over four years. Opinion remained divided on whether the RBI would hike rates again.
Sameer Narang, Chief Economist, Bank of Baroda, said in his report that the RBI has another hike up its sleeve. He noted that MPC members were concerned about the increase in core inflation, rising oil prices and inflationary expectations of households, while they were quite confident on the growth front with uptick seen in investments, manufacturing and construction.
Notably, output gap is more or less closed. But the backdrop of rising input costs in the form of soaring oil prices, the more-than-anticipated increase in core CPI, and significant rise in inflationary expectations prompted MPC members to raise rates.
The growth inflation mix led to the increase of 25 bps in policy rates. However, the policy stance has been kept neutral, which gives the MPC flexibility.
He said: “We believe another rate hike is in the offing as inflation is likely to print above 4 per cent in the medium term.” On the other hand, Indranil Sen Gupta, Chief Economist, Bank of America Merrill Lynch, said in his report that the ‘dovish’ RBI minutes support their call that the MPC will hold rates if rains are normal.
He said: “Markets do need to calm down and stop wishing rate hikes on itself (and the RBI). In fact, the retention of neutral stance should indicate that this is not a tightening cycle. Fundamentals do not support a higher inflation outlook. Both growth and inflation have gone up on base effects that will fade by September. Second, liquidity remains tight with M3 growth at 10.5 per cent FYTD, well below the 12 per cent medium-term average. Finally, rains are proceeding well.”
He added: “Although May inflation printed a higher-than-expected 4.9 per cent, this was largely on base effects. We continue to expect inflation to peak off to 4.2 per cent in 2H FY19, below the RBI’s 4.7 per cent. We think the MPC’s inflation concerns are overdone.”
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