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The Reserve Bank of India’s monetary policy committee (MPC) will reveal its rate decision tomorrow. Here’s what to expect.
Rate hike: The MPC will likely raise the repo rate by at least 35 basis points (bps). Don’t be surprised if it announces a 50 bps hike.
The rationale: There has been a lot of chatter about inflation peaking after retail inflation steadied at around 7 percent in June and the average reading for the first quarter came in below RBI estimates. However,
a) The recent inflation numbers are still way higher than the outside limit of 6 percent in RBI’s inflation targeting mandate.
b) Core inflation is sticky and even the headline number may not come down in a hurry.
* Although prices of many commodities are down, companies have not fully passed on previous raw material price increases to customers.
* Crude oil prices continue to fluctuate and the decision by OPEC+ to hike output by a paltry amount is not going to reduce our oil bill in a hurry.
* The erratic monsoons have meant that the area under paddy cultivation is lower than a year ago and rice prices have soared by 10 percent in the past two weeks in some places.
c) The MPC will derive comfort for a 50 bps hike from the economy’s resilience as seen from high frequency data. India’s PMI manufacturing came in at an eight-month high, fuel sales have risen sharply, albeit off a low base, and Goods and Services Tax collection too closed in on Rs 1.5 lakh crore. True, there was some loss of momentum in the services sector in July, but in a nutshell, domestic demand remains strong despite weak consumer confidence and will provide stability to India’s growth.
d) RBI will also not like to see the interest rate differential between India and developed markets such as the US narrow too much. The US Federal Reserve hiked rates by 75 bps in its last meeting and is likely to continue its inflation fight. Thus, there is some pressure on RBI to not fall behind too much in hiking rates to ensure that foreign portfolio inflows which have restarted don’t turn turtle.
What else? RBI is unlikely to make any changes to its inflation and growth forecast of 6.7 percent and 7.2 percent.
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Ravi Krishnan
Moneycontrol Pro
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