CPI inflation to trend higher; chances of rate hike rising

Inflation is expected to trend higher and though RBI may keep policy rates on hold in 2018-19, there are also increasing chances of a rate hike, says a UBS report.

According to the global financial services major, minutes from the February 7 meet of Monetary Policy Committee (MPC) seem "hawkish", and highlight upside risks to inflation.

The Reserve Bank kept the key policy rate unchanged at 6 per cent for the third consecutive time in the last policy meet in view of the firming inflation.

As per the minutes , there was broad consensus that risks to inflation are clearly tilted to the upside. Moreover, fiscal slippage and higher MSP are the key concerns, UBS said in the research note.
 

UBS expects headline CPI inflation to remain in the range of 5.1-5.6 per cent over the next few months and average 4.9 per cent year-on-year in 2018-19.

"In our base case, we expect the MPC to keep rates on hold in 2018-19," UBS said.

However, factors that may lead to a rate hike include higher MSP pushing up food inflation, firming up of global crude oil prices and populist spending in the run-up to 2019 Lok Sabha election.

If these risks materialise, "we do not rule out a pre-emptive 50 bps hike over the next 12 months to ensure macro stability risks are contained," UBS said.

Meanwhile, according to a Morgan Stanley report, the inflation trajectory will hold the key towards determining when the central bank will hike interest rates.

"In this context and also from our read of the MPC statement and the minutes, while the next move is likely to be a rate hike, it is unlikely to be taken up immediately," Morgan Stanley said in a research note.