• HDFC
• 26 Apr 2018
• Knowledge Centre

HDFC, Tester

The minutes of the Monetary Policy Committee (MPC) released on 19th April 2018 revealed a strong possibility of the Reserve Bank of India (RBI) hiking interest rates in the near future.

 

Though there was no indication or mention of a probable rate hike in the RBI monetary policy (released once in every two months), the minutes of the meeting indicated that India's central bank could take on a more hawkish tone as early as June, despite the easing of inflation. The MPC has highlighted several concerns, including that of an increase in minimum support prices (MSP) for farmers, high and volatile crude oil prices, and fiscal concerns, among others.

 

According to the minutes, “Several factors are likely to influence the inflation outlook. First, with the sharp moderation in food prices in February-March, the inflation trajectory in H1:2018-19 is expected to be lower than the projection in the February statement, despite a likely reversal in food prices in H1. Overall food inflation should remain under check, on the assumption of a normal monsoon and effective supply management by the Government.”

 

RBI’s forecast for growth in FY19 came in at 7.4%, up from 6.6% for FY18. This was accompanied by anendeavorto keep the medium-term target for headline inflation at 4%.

 

According to the minutes of the MPC, “Turning to the growth outlook, several factors are expected to accelerate the pace of economic activity in 2018-19. First, there are now clear signs of revival in investment activity as reflected in the sustained expansion in capital goods production and still rising imports, albeit at a slower pace than in January.Second, global demand has been improving, which should encourage exports and boost fresh investment. On the whole, GDP growth is projected to strengthen from 6.6% in 2017-18 to 7.4% in 2018-19 – in the range of 7.3 to 7.4% in H1 and 7.3-7.6% H2 – with risks evenly balanced.”

 

As reported in a print media publication, in his justification for a pause in policy rates, RBI Deputy Governor Viral Acharya indicated that in the next policy review, he might shift the neutral liquidity stance towards the withdrawal of accommodation, suggesting the possibility of a rate hike in the future.

 

In the RBI monetary policy meeting held in April this year, the central bank voted for a status quo in the repo rate, keeping it unchanged at 6%. As everybody expected, once again, on 5th April 2018, MPC left the policy rate unchanged and the stance of the policy neutral. However, the tone of the policy is decidedly less cautious than it was in February.

 

As of now, one of the main reasons for the softening of inflation is the moderating of vegetable prices. However, these are volatile in nature and need to be tracked on a continual basis.

 

Retail inflation rate eased to 4.28% in March 2018, after touching a high of 5.2% in December 2017. RBI reduced its April-September 2018 retail inflation projection to 4.7% from 5.1%, from a previous range of 5.1% to 5.6% in February 2018.

 

A note by the rating agency ICRA stated that the ‘Minutes (of the Monetary Policy Committee)’ suggests that a back-ended rate hike in 2018 remains a possibility if headline inflation exceeds the trajectory set out by the MPC.’ In the forthcoming Monetary Policy review, a revival in economic activity will play a significant role in the possibility of a rate hike.

 

As several upside risks to inflation persist, the RBI may like to wait for more data and watch how various risks to inflation evolve, going forward before changing its tone or rate policy.