RBI Monetary Policy: Will rates be hiked for first time since January 2014?

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Published: June 6, 2018 9:33:22 AM

The decision on the key lending rates will be announced by the Monetary Policy Committee (MPC) on Wednesday after a three-day meet.

RBI, bond market, bond market dealers, repo rateRBI had last raised the short-term lending rate (repo) to 8 percent in January 2014. (Reuters)

RBI Monetary Policy: The decision on the key lending rates will be announced by the Monetary Policy Committee (MPC) on Wednesday after a three-day meet.  The key interest rate may be hiked for the first time after four-and-half years on account of rising crude oil prices and high inflation, ratings agencies said. RBI had last raised the short-term lending rate (repo) to 8 percent in January 2014. Since then, rates have either reduced it or maintained status quo. The current repo rate stands at 6 percent. It would be interesting to see if RBI raises rates for the first time since January 2014.

Kotak Research said: “Our call is influenced by persistent shocks of higher fuel prices and weaker rupee along with incipient risk of higher-than-usual MSP increases. We pencil in 50 bps of rate hike (August and October) and expect June policy to strongly signal the same. However, if MSP increases are in line with recent trends, the RBI could have some space to maintain status quo.”

A large number of economists expect RBI to increase key interest rates, Reuters poll said. There are some analysts that think the central bank will stay on hold and use this week’s meeting to prepare for an August hike.

“In our baseline forecasts (Brent future curve), in which the oil price gradually retreats from $ 79 per barrel currently to $72 per barrel towards end-2019, we expect the MPC to hike rates by 50 bps in the rest of FY19 starting from its August meeting. However, a crude oil shock (towards $ 100/bbl) and/or Indian rupee weakness higher than 70 to the US dollar may cause the rate hike cycle to start sooner (June) and be more aggressive (at least another 75 bps from now),” UBS said.

“The June policy decision is a close call; we assign a 40 per cent probability to the MPC voting for a 25 bps hike in June itself, followed by another 25 bps hike in August,” said a Nomura Global Economics report.

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