RBI Monetary Policy: After India’s central bank RBI hiked the key policy rate by 25 basis points, global firm Morgan Stanley said that it had not expected a rate hike. Will it disrupt India's growth recovery?
RBI Monetary Policy: After India’s central bank RBI hiked the key policy rate by 25 basis points, first time after January-14, global firm Morgan Stanley said that it had not expected a rate hike. Notably, RBI has hiked the interest rates, citing a major upside risk to the baseline inflation on the back of high crude oil price. The central bank said that there was a 12% increase in the price of Indian crude basket, which was “sharper, earlier than expected and seems to be durable.”
Will the rate hike lead to a disruption in India’s growth recovery? “Though the rate hike happened earlier than we had expected, we think the rate hike cycle will not disrupt the growth recovery,” Taking stock of the current status of the economy, RBI said that for April and May, the composite PMI held broadly steady as compared to the March quarter, while hard data points (such as sales of passenger cars, motorcycles and commercial vehicles) have all continued to exhibit strong growth at a broadly similar pace as compared to previous months.
According to the firm, RBI is likely to hike interest rates in August as well as October. “We expect rate hikes in the August and October meetings but that the total quantum of rate hikes will remain at 75 bps for this cycle,” Morgan Stanley noted.
Further actions by the apex bank will centre around its inflation outlook. Considering that the inflation outlook is pegged by the central bank at 4.7% YoY in H2FY19, two more rate hikes would take real policy rates to ~ 205 bps from 165 bps currently, observed the report. “The risk to our view is if the MSP policy turns out to be more inflationary than expected or if incoming data on inflation surprises on the upside,” Morgan Stanley said.
“Crude oil prices have been volatile recently and this imparts considerable uncertainty to the inflation outlook – both on the upside and the downside,” the RBI said in the MPC statement. RBI’s MPC began its 3-day meeting on Monday. The six-member MPC, headed by Governor Urjit Patel, is meeting for three days for the first time instead of the usual two days due to some administrative exigencies.