According to Goldman Sachs analysts, RBI may tighten policy rates further going forward, should core inflation remain sticky, and growth continues to improve.
While persistently higher inflation continues to remain a matter of concern, global brokerages are now watchful of the RBI’s next move with respect to interest rates. In the minutes of the August Monetary Policy Committee meet, released on Thursday, the RBI said inflation risks continue to remain elevated and governed by factors like minimum support price, crude oil, monsoon, and GST. According to Goldman Sachs analysts, RBI may tighten policy rates further going forward, should core inflation remain sticky, and growth continues to improve.
The Reserve Bank of India (RBI) had in its August Monetary Policy Committee (MPC) meet increased the policy repo rate by 25 basis points to 6.50%. Goldman Sachs added that the RBI is likely to pause until the second quarter of 2019 and hike policy rates by 75 bps thereafter, but balance of risks around these forecasts are tilted towards earlier rather than later tightening.
In the MPC minutes released on Thursday, RBI governor Urjit Patel flagged concerns over persistently high inflation while acknowledging that growth impulses in the economy continue to be reasonably strong. Notably, five out of 6 members had voted for a rate hike at the August meeting. A neutral policy stance was maintained due to “several uncertainties that are present”, the RBI said.
In a note, Kotak Securities said that the RBI MPC minutes seem to have been broadly in line with the August policy statement signaling a pause in the near term, especially given the moderation in the recent inflation readings. “While the growth-inflation dynamics and the assessment of monetary policy transmission may keep the MPC on hold through rest of FY2019, we remain watchful of the INR depreciation on the back of ongoing EM meltdown in financial assets,” the note said. Kotak Securities added that persistence of global risk-off and a consequent runaway depreciation in Indian rupee may warrant unconventional measures by the RBI, including further rate hikes.
While GS expects a pause in interest rate hike till Q2 and Kotak Securities for the whole of FY2019, HSBC Global Research expects another 25 bps rate hike in Q4, which will take the repo rate to 6.75% by the end of FY18. HSBC analysts said demand for currency in circulation is expected to rise as rural India revives on the back of higher MSPs, recent inflation uptick, construction sector activity and normal rains.