ICRA's principal economist Aditi Nayar says the Monetary Policy Committee’s (MPC) surprise decision wisely hedges before the crucial data on monsoon, minimum support prices (MSP) and volatile global oil prices play out going forward.
A day after the Reserve Bank of India (RBI) hiked key policy repo rate by 25 basis points or 0.25 percentage points to 6.25 percent, Aditi Nayar – Principal Economist of ICRA Ltd. speaks to Moneycontrol.
In the interview, Nayar says how the Urjit Patel-led Monetary Policy Committee’s (MPC) surprise decision wisely hedges how the crucial data on monsoon, minimum support prices (MSP) and volatile global oil prices pans out going forward.
According to Nayar, even as the growth prospects are positive lingering risks of global trade wars may limit a sharp growth recovery.
Excerpts from the interview:
RBI surprised the markets as it hiked its repo rate in the June policy. What is your take on this?
We were expecting a rate hike sometime this year and RBI has given it in June policy itself. It is a good pre-emptive move by the MPC in terms of the risks which have already manifested itself, particularly the crude oil prices. Certainly, between February and April policy, it didn’t look like the oil prices will rise as much as they have. But it looks like the MPC has wisely decided to hike rates. Also, in the August policy, it will be a lot data-dependent policy trajectory. Lot of items where there is clarity awaited, on how monsoon distribution will turnout, how the MSP (minimum support price) will pan out, will crude oil prices stabilize or go up from here. So the neutral stance also makes sense.
Talking about oil prices, they have risen 12 percent since the last policy. How will the global prices and US Federal Reserve’s decision movement impact domestic prices and will it be an imparting factor for the next policy?
These two (domestic prices and global oil prices) will be crucial for the decision in the next policy for sure. But by August, monsoon and MSP will be on top of the mind for the domestic policy drivers, equally important if not more important than the crude oil prices. With the Fed, I think June hike is largely priced in and market is already expecting between two and three more hikes by this calendar year.
Crude oil prices have cooled off from the spike of $80 per barrel. Need to see if they further stabilize or revert to the peak levels. Our view is that we have estimated the crude oil prices for the Indian basket to be around $75 per barrel for FY19. Based on that, we expect average CPI inflation to be 4.6 percent for this year. And if crude oil prices rise to $80 and is fully transmitted into the domestic fuel prices with no tax cuts then the CPI inflation could be at 4.9 percent. In that situation, we could see another rate hike around Q3 of FY19.
So in such a scenario where crude prices are rising, rupee is depreciating and US fed is on a rate hike cycle, do you think international factors were considered more than the domestic factors in this policy?
I think it was a combination. RBI is certainly targeting inflation and we have seen the transmission of oil prices on domestic prices as well as transport costs. Also, the (increase in) forecast in inflation trajectory for Q2 FY19. So the risks which were flagged have come to the fore. Though the MPC has indicated that volatility is moving both ways and that’s a fair point.
RBI has suggested growth forecast to be at 7.4 percent. What is your view?
We do expect growth recovery in FY19. We should see growth consolidating above 7 percent. But there are risk factors emerging which may not allow a sharp recovery. So, we have lot of positives such as expectations of a good monsoon, higher MSP, support to farmer incomes, staggered pay revision or state governments, all of which should support consumption growth this year. Government expenditure is also likely to be high but one of the concerns is that there will be more focus on consumption and what will happen to infrastructure funding, that is one risk.
Second factor is the higher crude oil prices which will hurt the purchasing power of consumers and may eat into the margins of producers as well.
The third is in terms of interest costs, bond market rates have already gone up, bank lending rates could also rise in the next few months.Fourth is that a weaker rupee should support export growth and improve competiveness abut there is a minor concern lingering in terms of the trade wars. So overall, domestic consumption growth should be good, government should support but there are some lingering risks which could prevent a sharp recovery in growth.