The bond markets are expecting the Reserve Bank of India (RBI) to pause on Wednesday when the central bank reviews monetary policy but expects it to adopt a fairly hawkish tone.
Jayesh Mehta, MD & country treasurer at Bank of America Merrill Lynch (BofA-ML), feels the policy can swing either way. “The global data hints towards a pause for this meeting. On the other hand, data points may not be very precise and the MPC could decide to hike the rate for once and then see how things follow. We will have to wait and watch how things unfold,” Mehta said.
Indranil Sengupta, chief economist, BofA-ML, wrote the RBI’s monetary policy committee (MPC) should pause on Wednesday on a hawkish note. Sengupta believes that if the rains are normal, rates will be on hold for a longer time but otherwise the central bank could raise rates in October. “Inflation should peak off (barring September) if rains are normal. We track inflation at 4.6% down from June’s 5%,” Sengupta wrote.
Lakshmi Iyer, CIO (debt) & head – products, Kotak Mutual Fund, is of the opinion that the MPC could afford to do a wait and watch at this juncture and consider more data points before a rate action. “The August MPC decision could be a close call. The consumer price index (CPI) for June was lower than expected. Crude oil prices have been largely range-bound. There also seems uncertainty on how the global trade war could potentially unfold. In such a scenario, there might not be much urgency in delivering back to back rate hikes when the policy stance is still neutral. From a market perspective, bond yields already seem to have discounted another rate hike and hence yields are already at elevated levels,” Iyer added.
A Balasubramanian, CEO, Aditya Birla Sun Life, believes that there is sufficient rationale that exists for the rates to go up but the timing of the increase is something that one will have to wait and watch. “The rates will totally increase by 50 basis points (bps) in 2018 which can be spread out over the next few meetings depending on the statistics the RBI wishes to take into consideration. The bond market has already factored in the rate hike situation,” Balasubramanian said.
RBI deputy governor Viral Acharya, in the minutes of the June meeting of the MPC, highlighted that under the situation of the economy then, any upward pressure on food prices such as through generous MSPs would exacerbate headline inflation pressures.
Indranil Pan, chief economist, IDFC, says to balance the growth-inflation trade-off now is a better option rather than facing up to a situation of a 50 bps increase at one go “Being a targeting central bank, the RBI also needs to ensure credibility of policy-making in achieving the medium-term target of 4% headline CPI. Further, we think that a step-wise 25 bps increase in the repo rate. Further, we do not think there is immediately a need for the RBI to change its “neutral” stance as prevailing uncertainties would enable flexibility with the RBI to alter its reaction function to suit incoming data,” Pan said.
The spending on house rent allowance (HRA) by the government has been on the upscale and could have partially contributed to the core inflation to grow at 6.35% ; the general inflation moved up to 5% for June. In spite of raising the minimum support price (MSP) and a resultant increase in food prices, the core inflation remained higher than the general inflation. In addition, the monsoon deficit at around 5% is comparatively lesser this season and has proved to be positive for the country’s agricultural sector and the RBI governor, Urjit Patel, had also mentioned in the previous MPC meeting that a normal monsoon, by keeping food inflation benign, could act as a mitigating factor.