RBI Monetary Policy: Why emerging markets champion Mark Mobius says rate hike would be ‘big mistake’

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Published: July 31, 2018 10:17 AM

RBI Monetary Policy: The veteran investor Mark Mobius said that a rate hike by the RBI in its upcoming monetary policy review would be a “big mistake” as India is home to states with different economic situations.

Mark Mobius also told Bloomberg that various Indian states are facing problems and a cut in borrowing costs is needed to boost investments. (Image: Reuters)

RBI Monetary Policy: The veteran investor Mark Mobius said that a rate hike by the RBI in its upcoming monetary policy review would be a “big mistake” as India is home to states with different economic situations. “I think they should lower interest rates in India, not raise them because you have many states with different economic situations all over the country,” Mark Mobius, partner and co-founder of Mobius Capital Partners, said in an interview with Bloomberg TV in Hong Kong. “You got real differences in India. It would be a big mistake for them to raise.”

Mark Mobius also told Bloomberg that various Indian states are facing problems and a cut in borrowing costs is needed to boost investments. His view comes in stark contrast to various other analysts who believe a rate hike is the need of the day considering rising CPI and WPI inflation numbers.

In a research report, India’s largest bank SBI said that the RBI may not go for another round of rate hike at this juncture. The only reason for a rate hike by RBI at this juncture might be to “satiate the self fulfilling prophecy” of market expectations of a rate hike to stem the rupee depreciation (though rupee depreciated by 3 per cent post June), it added.

We pencil in a repo rate of 25 bps in the August policy. The key reasons to hike are (1) headline inflation remains well above the 4% mark over the medium term, (2) core inflation remains sticky and high along with risks of higher input prices being passed on over the next few quarters, (3) announced MSP hikes and the risk of it percolating to food inflation (which also implies the RBI should revise its headline inflation marginally higher for 2HFY19), (4) concerns on INR remain, and (5) growth remains on a stronger footing implying that the output gap is fast closing in and can lead to inflationary pressures in the medium term. Even as we call for a rate hike, the RBI may pause mainly to wait-and-watch if MSP hikes start to percolate to food prices and how the inflationary expectations have evolved over the last quarter, Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities said.

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