RBI to increase interest rates? Here’s why experts believe there is more probability for this

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Published: April 22, 2018 10:56:50 AM

The Reserve Bank of India is expected to maintain status quo on policy interest rates in this financial year, but the probability of rate hike has increased, experts believe.

RBI, RBI interest rate, Reserve Bank of India, Kotak Institutional Equities, Morgan Stanley, RBI's monetary policy, The minutes of the April MPC meeting released by the RBI noted that RBI Deputy Governor Viral Acharya favoured withdrawal of monetary accommodation in the next policy review meeting scheduled on June 4-5.

The Reserve Bank of India is expected to maintain status quo on policy interest rates in this financial year, but the probability of rate hike has increased, experts believe. According to domestic as well as foreign brokerage firms like Kotak Institutional Equities and Morgan Stanley, the minutes of the RBI’s monetary policy committee (MPC) are “hawkish” and indicate a hike in key policy rates.

“While we continue to expect the MPC to maintain status quo in 2018-19, the probability of rate hike has increased after the minutes suggested that more members are inclined towards withdrawal of accommodation,” Kotak Economic Research said in a note. The minutes of the April MPC meeting released by the RBI noted that RBI Deputy Governor Viral Acharya favoured withdrawal of monetary accommodation in the next policy review meeting scheduled on June 4-5. Meanwhile, Executive Director Michael Debabrata Patra voted for an increase of 25 basis points in April itself, though the majority view of maintaining status quo prevailed.

Besides Patel, four other MPC members — Chetan Ghate, Pami Dua, Ravindra H. Dholakia and Acharya — had voted in favour of status quo in the repo rate. The six-member MPC, headed by RBI Governor Urjit Patel, had left the benchmark repo rate unchanged for the third time in a row after deliberations on April 4-5, citing inflationary concerns.

According to Morgan Stanley, the MPC might not tilt into a rate hike just yet. “Unless GDP growth and high-frequency indicators surprise strongly on the upside and hint at a stronger than-expected recovery between now and the next MPC meeting, we think that our base-case view of a rate hike in 4Q remains largely intact,” Morgan Stanley said. Meanwhile, BofAML noted that though the RBI minutes indicate a hawkish tone, data suggests a rate cut in its August policy meet. “We retain our call of August 1 RBI rate cut, if rains are normal, with inflation peaking off. We track April inflation at 4.3 per cent,” it noted.

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