MANY PARTICIPANTS don’t see a change in the stance in favour of an extended period of rate hardening
India’s central bank may raise the benchmark reference rate by a quarter percentage point for the second time in two months, citing upside risks to inflation, an ET survey ahead of this week’s bi-monthly policy meeting on setting broader financing costs showed.
In the poll conducted among 22 market participants, more than half the respondents said they expect an increase of 25 basis points in the crucial rate, with the Reserve Bank of India (RBI) continuing its vigil on prices after the Monetary Policy Committee had raised the cost of financing in June — the first increase since the Narendra Modi administration was voted into power. “There has been an incremental deterioration in the inflation outlook since the June RBI policy meeting,” said Shashank Mendiratta, India economist at ANZ bank. “The RBI has been highlighting several long-standing risks to inflation. The key ones include higher oil prices, global financial market volatility, and an increase in minimum support prices (MSPs) for agricultural crops.”
India’s consumer prices rose 5% in June from a year earlier after a 4.87% increase in May. With this, the pace of retail inflation climbed for the third consecutive month. During the June policy, RBI had said its future rate moves would be data-dependent, including the impact of farm support prices, crude oil movements and higher allowances to government employees.
“A rate hike will reaffirm its commitment toward the inflation targeting framework and play an important role in reducing risks to macroeconomic stability amidst several global uncertainties,” said Anubhuti Sahay, chief India economist at Standard Chartered Bank. Although a rate rise on Wednesday looks a possibility, not many are predicting a change in the policy stance in favour of an extended period of rate hardening. RBI’s current stance is neutral. Even crude oil prices, which surged to USD 80 per barrel, have come off to trade in the range of USD 72-74 a barrel.
RBI Likely to Go for 25bps Rate Hike as Inflation Risks Mount
Oil will converge back to the range of USD 45-65 a barrel (in the) next two years, based on factors like US shale production and OPEC (Organization of the Petroleum Exporting Countries) supply side cuts, shows an estimate by global rating company Moody’s. “Given the preference to be non-committal on the path ahead and volatility in global oil/ domestic food prices, the stance is likely to remain at neutral,” said DBS Bank economist Radhika Rao. “A preemptive move is preferable to prevent a hardening in inflationary expectations, also in light of domestic expansionary policies.”
In June, the RBI had revised consumer inflation forecasts to 4.8-4.9% between April and September and 4.7% in the latter half of the fiscal year. Corporate pricing power and output gap also play a large role in the evolution of inflation, with stronger trends allowing a fuller pass-through of higher input costs.
A weakening rupee is also inflationary, increasing the supply of currency in the market. The local unit hit a new record low at 69.13 a dollar on July 20. It has lost over 7% this calendar year. “Monetary policy is about more than just the current situation: The signaling function of policy is forward looking and is articulated to anchor inflationary expectations at least a year ahead,” said Sugata Bhattacharya, chief economist at Axis Bank. New Delhi, meanwhile, raised the minimum support prices (MSPs) on farm output at a 50% markup over costs.
“A mild upward calibration in inflation projection may come from RBI, which will take into account the MSP impact,” said Shubhada Rao, chief economist at Yes Bank.
The Economic Times, 30th July 2018, New Delhi
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