Will RBI announce a rate hike or hold them steady in tomorrow's MPC meet?
If you are hoping for some good news in the RBI's last bi-monthly Monetary Policy Statement for this fiscal - which will be made public tomorrow - to chase away your Budget blues, you're likely to be disappointed. Rising oil prices, prices accelerating at the fastest pace in 17 months and the government's plans to raise crop support price are likely to restrain the apex bank from slashing benchmark lending rate for the third time in a row. The last rate cut was in August 2017, when it was brought down to the current 6%, a six-year low. "Historically, RBI has been known to adopt a hawkish stance on inflation," writes Smartkarma Insight Provider Pankaj Sharma in a recent report. And annual inflation accelerated to 5.21% in December, breaching the central bank's medium-term target of 4% for a second consecutive month. To compare, retail inflation, based on Consumer Price Index (CPI), stood at 4.88% in November last year and 3.41% in December 2016. Based on the majority view of the six-member Monetary Policy Committee in previous meetings, Sharma says that the only two options with the RBI are to either maintain status quo on rates or to increase the rates by 25 basis points, if not more. Furthermore, industrial production has shown a big rebound in the latest data, which makes it less necessary for RBI to lend policy support through rate cuts. Sharma is not the only one to predict that a rate hike is on the cards, in the near future if not tomorrow. Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities expects the RBI to hold rates now but adds that "the tone will likely be more hawkish with probability of rate hikes in 2018-19". According to him, even as the RBI takes note of the fiscal consolidation and expenditure on roads, railways, "it will be cautious on risks of revenue slippages, increase in food subsidy (possibly through higher MSP) and overall expenditure quality, and possible fiscal slippages". However, the central bank will need to tread carefully, given the prospect that any premature tightening move could throttle an economy expected to grow 6.7% in the current fiscal, the slowest pace in about three years. Any move towards higher rates is, hence, unlikely to bode well with executives and government officials, especially as the economy is finally showing signs of recovery. Moreover, despite the uptick in industrial production, it is still at its lowest levels in years and a rate hike at this point is sure to hurt. Meanwhile, benchmark 10-year bond yields have risen more than 80 bps since July-the biggest move since the 2013 rupee crisis-due in large part to worries about a more hawkish RBI. However, industry body Assocham in a post-Budget paper pointed out that the apex bank should not "over-react" to high yield pressures in the bond market and refrain from hiking interest rates in the meeting currently underway. "Some of the macro indicators, including pegging of higher fiscal deficit of 3.3% for 2018-2019 and 3.5% of the GDP for the current fiscal, look difficult, but reaction of the bond market would ease out soon," it added. To end on a more optimistic note, a recent Bank of America Merrill Lynch Global Research report says, "We see 25bp [0.25%] RBI rate cut in August if rains are normal". With agency inputs