Taking a stance far more hawkish than suggested in the last policy review, members of the monetary policy committee (MPC) flagged a litany of risks to inflation and hinted at a rate hike in minutes of their April meeting.
Taking a stance far more hawkish than suggested in the last policy review, members of the monetary policy committee (MPC) flagged a litany of risks to inflation and hinted at a rate hike in minutes of their April meeting. Governor Urjit Patel flagged concerns over risks to inflation that may emanate from an increase in minimum support prices and volatile crude prices in the MPC meeting that left key policy rates unchanged earlier this month.
“Inflation expectations have firmed up. Input cost pressures are rising and the corporates are gradually regaining some pricing power,” Patel wrote in the minutes. He added: “The outlook of inflation also faces several uncertainties emanating from the increase in MSPs for kharif crops, among others— the direct impact on inflation will be statistical in nature, which will be looked through fiscal slippages by the Centre and the states and the Monsoon’s performance.”
Deputy governor Viral Acharya wrote that the hardening in crude prices and the closing of the output gap had made him move substantially closer to switching from the neutral stance. He hinted at a rate hike in June. “I feel it is important to let some more hard data come in, especially on growth, and allow some more time to let the early skirmishes on the global trade front play out. I am, however, likely to shift decisively to vote for a beginning of ‘withdrawal of accommodation’ in the June MPC meeting,” he said.
RBI executive director Michael Patra was the only one to vote in favour of a 25-basis points rate hike in the April policy. Analysts expect the hawkish tone of the minutes to drive bond yields up in the coming days. Aditi Nayar, principal economist, Icra, said it suggests that a back-ended rate hike in 2018 remains a possibility, if headline inflation exceeds the trajectory set out by the MPC.