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Street expects hawkish tone in RBI policy on Wednesday, possible rate hikes in future meets

Over the next few policy conclaves, the MPC may change its stance to ‘hardening’ from ‘neutral’.

, ET Bureau|
Feb 05, 2018, 08.49 AM IST
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Mumbai: India’s central bank may sound far less benign on the immediate direction of interest rates at its latest policy meeting this week, with a confluence of factors — from fiscal slippage and a potential increase in farm-gate prices to rising oil costs — pointing to a steeper yield curve in Asia’s third-biggest economy.

According to an ET Poll conducted among 25 market participants, respondents were nearly unanimous that the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) may sound hawkish, with the panel’s commentary Wednesday likely hinting at a possible increase in rates in its future bi-monthly policy meetings.

Over the next few policy conclaves, the MPC may change its stance to ‘hardening’ from ‘neutral’.

“Bigger fiscal deficits and an upward bias in minimum support prices (MSP) of agricultural products (as indicated in the Budget), against the backdrop of a rise in global commodity prices, pose some upside risk to inflation,” said Siddhartha Sanyal, chief economist at Barclays Bank. “This might influence the MPC to adopt a more cautious policy stance.”

Bond yields have been strengthening across the globe, and the likelihood of an increase in the cost of funds caused Friday the worst single-day decline by way of points on the Dow Jones Industrial Average since the financial crisis of 2008. Yields on the US 10-year Treasury have now surged to 2.8450 per cent, the highest since January 2014.

In the Union Budget last week, the government proposed to buy agricultural produce at 1.5 times the cost of production, marking a major policy shift after keeping the average MSP increase in low single digits over the past three years. This move could change the inflation trajectory in a country where at least three in five citizens rely on farm output for a living.

“Upside risks to inflation on slower pace of fiscal consolidation, higher crude oil prices and sharper MSP increases are likely to be flagged (at the policy). It will be interesting to see if there were any votes for an increase,” said Anubhuti Sahay, head, South Asia economic research (India), Standard Chartered Bank.

The government has said that its fiscal deficit is projected to be 3.3 per cent of the GDP in 2018-19, while the debt market was expecting it in the range of 3-3.1 per cent for the next financial year.

India’s retail inflation, as measured by the consumer price index (CPI), accelerated to a 17-month high of 5.2 per cent in December as fuel and vegetable prices hardened, erasing chances of any monetary easing. The gauge was at 4.88 per cent in November. In the October monetary policy, the RBI raised its inflation projection to 4.2-4.6 per cent for the second half of the current financial year, citing rising global oil prices and an uncertainty over kharif crop output. It had projected the CPI in the range of 4-4.5 per cent in its August policy.

“This is an opportunity for the RBI to show that it was justified in expressing worries over inflation,” said Abheek Barua, chief economist at HDFC Bank. “With the rise in MSP, domestic inflation may come under pressure. The likelihood of higher rates has increased as inflation has overshot the RBI’s target last year.”

Global crude oil prices have hovered around $70 a barrel recently, stoking inflation concerns in a nation that imports four-fifths of its energy needs.

The inflation forecast for Q4 (Jan-March) of FY19 is likely to be raised from 4.5 per cent to 4.75-4.8 per cent in the February review because of rising crude oil and other commodity prices and expectations of higher MSPs, according to Shailendra Jhingan, MD, ICICI Securities Primary Dealership. “We can expect the RBI to be hawkish,” he said.

The benchmark bond yield has been surging, with the index hitting a 23-month high at 7.66 per cent last week.

“The RBI should ensure that debt imperfections get weeded out, leading to a stabilisation in bond yields and better price discovery,” said Soumya Kanti Ghosh, chief economic advisor of the State Bank of India (SBI).
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