The Reserve Bank of India is expected to begin its rate hike cycle from December quarter, and may go for three rate hikes by 2019 taking the key policy rate to 6.75 per cent.

According to a Morgan Stanley report, a significant overshoot of inflation relative to RBI’s target is not likely. Moreover, the economic recovery will be on a surer footing by the fourth quarter of 2018 and this might prompt the central bank to go for a rate hike.

“With end demand holding up well, private capex appears poised for a recovery later this year,” Morgan Stanley said in a research note.

It further noted that, “as the economy enters into a full-fledged recovery, we expect the central bank to embark on a shallow rate hike cycle beginning October-December of 2018.”

The report said a recovery in private capex is likely later this year and this will boost economic growth.

“We maintain our expectation for a recovery in real GDP growth to 7.5 per cent in 2018 and further to 7.7 per cent in 2019, from 6.4 per cent in 2017,” the report said.

Over 2018-19, Morgan Stanley has pencilled in a total of only three rate hikes, taking the terminal policy rate to 6.75 per cent.

“We expect RBI to commence its rate hike cycle from the fourth quarter of 2018 , as we think that the MPC does have time to pause and assess more incoming data before acting in the December quarter,” the report noted.

In its first bi-monthly monetary policy for 2018-19, RBI had left repo rate unchanged at 6 per cent. The MPC maintained status quo for the fourth consecutive time since August last year.

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