DNA Money Edit: Stronger economy, rate hikes in offing

Is the four-year long rate-cut cycle coming to an end? Two global investment banks, Goldman Sachs and Morgan Stanley strongly believe so. In two separate reports, they said the Reserve Bank of India (RBI) would start raising key policy rates from next year as the economic growth engine picks up pace and inflation rises on account of higher crude and commodity prices.

The silver lining is that both believe in stronger economy in 2018-19 and beyond as the negative impact from shocks such as demonetisation and GST fades.

Goldman Sachs said it expects consumer price index (CPI) inflation to rise above the RBI’s target band to 5.3% next fiscal due to a flare-up in food and commodity prices, leading to a hike in policy rates by 75 basis points by mid-2019. It expects India’s economy to grow 8% in 2018-19.

Drawing a similar conclusion, Morgan Stanley believes that the improved macro dynamics and gradual rise in inflation would lead to the central bank lifting the nominal interest rates in a countercyclical manner so as to prevent real rates from falling further. What is more, the bank recapitalisation programme is expected to unlock credit and private investment growth. It is surely a thumbs-up to Modinomics.