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Last Updated : Aug 02, 2018 02:13 PM IST | Source:

After 2 consecutive hikes, will RBI raise interest rates further in FY19?

Majority of experts feel there could be at least one more rate hike in the offing, which could happen in any of the policy meetings in FY19

Sunil Shankar Matkar

Inflation concerns forced the Reserve Bank of India (RBI) to raise repo rate for the second time in a row by 25 basis points to 6.5 percent on Wednesday. As a result, reverse repo rate now stands at 6.25 percent.

Repo rate is the rate at which the RBI lends money to banks while reverse repo is the rate at which the RBI borrows money from banks.

While maintaining GDP growth projection at 7.4 percent, the central bank raised its inflation estimates to 4.8 percent from 4.7 percent for the second half of FY19 and introduced 5 percent inflation rate for first quarter of FY20 while listing many uncertainties and its impact on the inflation like the effect of MSP on farm produce, volatility in global financial markets, staggering impact of HRA revision by State governments and which all will be tracked very closely.


The early announcement of inflation projection for the next financial year indicated that there could be more risk to its the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent, though the RBI has a Neutral stance with intention of keeping itself ahead of the curve.

The Monetary Policy Committee noted that domestic economic activity has continued to sustain momentum and the output gap has virtually closed, but uncertainty around domestic inflation needs to be carefully monitored in the coming months.

"In addition, recent global developments raise some concerns. Rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity. Geopolitical tensions and elevated oil prices continue to be the other sources of risk to global growth," it reasoned.

Majority of experts feel there could be at least one more rate hike in the offing which could happen in any of the policy meeting in FY19, while few are saying neutral stance indicated that there could be long term pause for further rate hike and rate hike in medium term is only possible if inflation goes beyond MPC's expectations.

Experts who are in the boat of another rate hike likely said RBI, in its June policy meeting, also had a neutral stance and hike rate by 25 basis points to 6.25 percent and today also it raised rate by another 25 bps to 6.5 percent with keeping neutral stance, which indicated that there could be more inflation risk going ahead.

"We are away from 4 percent inflation target for some time now," the RBI governor said. "This in itself indicates an inflationary trend and we could be in for some surprises on the upside in repo rates," Raj Mehta, Fund Manager, PPFAS Mutual Fund said.

He further said the direction and the trend of interest rates will remain upwards in the near future through the quantum and the frequency of rate hikes remain uncertain. "We think RBI's statement seems more hawkish than its stance on inflation and inflationary risks."

Shailendra Kumar, CIO at Narnolia Financial Advisors, also sees upside risk to inflation forecast despite favourable base impact going forward. "Also, the risk of fiscal slippage is high owing to elections ahead. RBI deciding to stay ahead of the curve also implies higher uncertainties."

So his base case assumption now is one more rate hike this fiscal year before the current tightening cycle peaks out, he said.

R Sivakumar, Head - Fixed Income, at Axis Mutual Fund also feels that the RBI can hike again within the next six months.

"RBI expects inflation to sequentially accelerate from here till June 2019 quarter. "This is based partly on the MSP increases whose effects will be felt towards the latter part of this financial year and into the next year," he reasoned.

Given the fact that RBI has increased the projection for inflation, there is high probability of further rate hike in 2018 despite RBI retaining its neutral stance, Gaurav Dua, Head of Research, Sharekhan said.

Abheek Barua, Chief Economist, HDFC Bank, too, believes that another rate hike is still on the table and as a result bond yields could continue to go up (after Wednesday's relief rally).

In this regard, it's important to watch out for the inflation readings in September and October (which could be reflective of the impact of higher minimum support prices-MSPs), he said.

He further said even without a major uptick in inflation, the sheer supply of government bonds (states and centre) could keep the yields elevated. "Important to note, so far only 20% of the budgeted borrowings for centre and state governments has been done with majority of the supply expected to come in the second half of the year."

Anant Narayan, Market Expert also thinks there is risk to 5 percent inflation projection for first half of FY20. "Fiscal stress could be on cards next year, so the market may start pricing couple of rate hikes going ahead."

Even bond yield curve suggests that there could be two more rate hikes this year, he said.

Pranjul Bhandari, Chief India Economist, HSBC also agreed with all above experts saying one more rate hike is possible in fourth quarter of FY19. "Risks like higher core inflation, rupee, crude and fiscal slippages are strong enough reasons for one more rate hike."

Meanwhile, Sujan Hajra, Chief Economist, Anand Rathi Financial Services said the monetary tightening is over for the time being, unless the inflation flares sharply beyond expectations.

"Liquidity conditions are already tight, market rates high and several factors (so far satisfactory monsoon, cut in GST rates and responsible fiscal conduct by the centre) can bring down inflation in the next 3-6 months, he added.

The current rate hike has been done with a neutral stance, which would mean that RBI may hold the rates for a few months and watch the inflation data, Raghavendra Nath, Managing Director, Ladderup Wealth Management said, adding the MPC may tighten further only if they see sharper rise in inflation.

Nikhil Gupta, Chief Economist- Motilal Oswal Financial Services said, "We don’t expect further rate hikes in the remainder of FY19."

"Although the RBI highlighted multiple risks to inflation and growth, the risks to both forecasts are evenly balanced. We believe that both inflation and real GDP growth in FY19 will be lower than the RBI’s forecasts. Further, as we move closer to the elections, the uncertainty will also increase," he reasoned.

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First Published on Aug 2, 2018 09:38 am
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