Moneycontrol Pro Panorama | Are you set for a rate hike tomorrow?

The Reserve Bank of India’s (RBI) Monetary Policy Committee, led by Governor Shaktikanta Das, is meeting on June 6-8, and is widely expected to hike policy rates to combat inflation

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Two sets of data released over the past week indicate favourable demand trends in the economy. Electricity generation jumped 20 percent in May over a year ago, reflecting strong offtake by consumers and user industries. Pharmaceutical product sales held up better, falling just 3.3 percent in May, despite an exceptionally strong base. Drug sales were up 48 percent in May 2021.

The data add to the strong reading in the services sector in May and allay some concerns about the effect of monetary policy tightening on the economy. The Reserve Bank of India’s (RBI) Monetary Policy Committee, which is meeting on June 6-8, is widely expected to hike policy rates to combat inflation.

Still, the underlying trends in the above-mentioned data points warrant caution. The expansion in the services sector is accompanied by cost inflation. The fall in pharma sales is contained by price hikes. Growth on a 12-month basis is also largely powered by price hikes.

Electricity costs are on an uptick as well. Faced with tight fuel supplies, the government has mandated coal imports and blending with domestic coal. This is set to raise production costs of electricity and will have a cascading effect on the domestic economy.

Cash-strapped power distribution companies (discoms) will be forced to pass on the rise in fuel costs to consumers and industries. Some discoms have already announced price hikes. This can put upward pressure on inflation.

“If passed, this (imported coal costs) could lead to a jump in electricity CPI inflation and contribute to a ~0.2 percentage points rise in headline inflation, in addition to the indirect cost, as firms rely on diesel generators,” warn economists at Nomura.

Unlike petrol or diesel which see frequent changes, electricity rates in India are raised over a period of time. The current electricity rate hike cycle has just begun and prices can see more changes across the country in coming months. This can keep the RBI on the watch, given the indispensable nature of electricity consumption.

Our experts have weighed in on the RBI's monetary policy choices. Sachchidanand Shukla, group chief economist at Mahindra & Mahindra, cautions against aggressive rate hikes. Aparna Iyer argues the need for the RBI to hike interest rates fast. “Inflation is a bigger enemy of growth than interest rate hikes, up to a threshold. The RBI’s test lies in defining that threshold accurately and reaching it fast,” she writes in this piece. Do read.

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R Sree RamMoneycontrol Pro