Reserve Bank may hold rates this week, wait for more data on inflation, oil price, monsoon
Top bankers and economists do not expect the Reserve Bank of India (RBI) to pull the trigger in June to hike interest rates. With Moody's lowering the growth forecast marginally, RBI may desist from nipping the growth momentum that has just begun. The monetary policy committee (MPC) will meet for two days on June 4-5 and their decision will be out on the website on June 6.
Rajnish Kumar, chairman, State Bank of India, told DNA Money, "RBI is unlikely to hike rates in June as the monsoon forecast is normal, the oil prices are expected to soften, inflation is still within manageable limits. Lowering of growth forecast by Moody's from 7.5% to 7.3% may also deter the Central Bank to hike rates now.
Since the last policy in April the risks have accentuated. Oil prices rose over 11-12%, US yields have remained steady around 3% and the dollar index rising by 4% with the US economy on a strong revival path are signs that the monetary policy committee members will have to study before they vote on Wednesday.
Raj Kiran Rai, chairman, Union Bank of India (UBI), said, "We are not expecting the MPC to revise rates now. But we expect that it might in the next policy. The central bank is likely to wait for more data on inflation, oil price movements and the onset of monsoon before it decides on a rate hike.
Economists believe that the Central bank will rely on more data before it shifts its stand. By August, most believe that data will be more definite on the inflation trajectory, especially after the minimum support price for kharif crops are announced.
Saugata Bhattacharya, chief economist at Axis Bank, said, "There is a high probability of a pause with a change in stance to tightening and a hawkish tone.
RBI has to be cautious of the capital constraints on several public sector banks which are under the prompt corrective action (PCA). If these banks are unable to lend, it will impact the small and medium enterprises who will be deprived of adequate financing at competitive rates.
Naresh Takkar, managing director and group CEO, ICRA, said: "Although the headline and the core CPI inflation for April 2018 revealed negative surprises, an immediate rate hike may be premature, given the lack of clarity on factors like the 2018 monsoons, the minimum support price (MSPs) and fiscal risks. However, the expected rebound in the average CPI inflation for FY2019, in conjunction with the higher-than-anticipated GDP expansion in Q4 FY2018, suggests that a back-ended rate hike cannot be ruled out, which is likely to be reflected in the tone of the policy document."
Higher-rated corporates are likely to tap the domestic bond market (despite elevated domestic bond yields) and external commercial borrowings (despite higher global rates) for their financing needs.
"While bond yields have already hardened, the back-ended monetary tightening in 2018, may push up bank lending rates. Accordingly, interest costs are likely to rise in the current fiscal, which would weigh upon margins as well as the strength of the investment recovery in FY2019," added Takkar.
- Bankers also feel inflation within manageable limits and lower growth forecast by Moody's may deter RBI to hike rates now
- Central bank will wait for more data on inflation, oil price movements and the onset of monsoon before it decides on a rate hike
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