There is 60% probability that the RBI (Reserve Bank of India) in its three-day bi-monthly MPC (Monetary Policy Committee) meeting may hike repo rates by 25 basis points, a UBS Securities report said. The six-member monetary policy committee led by RBI governor Urijit Patel will conclude their three-day meeting on 1 August 2018 and will declare the changes in repo rate and stance, if any. UBS Securities India, the domestic brokerage and research arm of the Switzerland-based global investment bank UBS, has indicated towards “a roughly 60% probability of the Monetary Policy Committee (MPC) hiking the repo rate by 25 basis points to 6.5%”.
“However, Looking at the inflation dynamics (headline CPI inflation came out well below consensus at 5% YoY in June), global crude oil prices (Brent lower by nearly US$6/bbl versus a recent peak of US$79/bbl in late June) and global trade war uncertainty, we believe it is a close call and the MPC might defer the rate hike to the October policy,” Tanvee Gupta Jain, Economist & Rohit Arora, Strategist at UBS Securities India Pvt Ltd said in a report.
UBS Securities said that a hike in repo rates now may avoid the risk of “steeper tightening in future”. According to UBS Securities, the key reasons why RBI shouldn’t defer rate hikes are weakening of rupee, the possibility of fiscal slippage and fiscal position imbalance on the concerns over GST collections. “INR has already weakened to an all-time low of 69 against the USD recently and the depreciation bias is likely to remain. Lastly, the fiscal position remains stretched and concerns about GST collections, the rise in states’ fiscal deficits and the risk of populist spending ahead of the 2019 election have increased the chance of fiscal slippage,” said UBS Securities.
According to UBS Securities, India’s macroeconomic imbalances are again a concern as June 2018 CPI inflation at 5% rose above the RBI’s inflation target of 4%. “Household inflation expectations (1-year ahead) at 9.7% as of June 2018 were the highest since September 2016,” said UBS Securities.