RBI likely to leave repo rate unchanged at 6%: ICRA

The six-member Monetary Policy Committee (MPC) is likely to leave the repo rate unchanged at 6 per cent in a close decision in the June 2018 policy review, amid uncertainty on the impact of some key inflationary risks, according to credit rating agency ICRA. Nevertheless, the tone of the policy document is likely to signal a withdrawal of accommodation and a rate hike could be imminent, it added.

Naresh Takkar, Managing Director and Group CEO, ICRA, said: “Although the headline and the core CPI (consumer price index) inflation for April 2018 revealed negative surprises, an immediate rate hike may be premature, given the lack of clarity on factors such as 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 (January-March) 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.”

Takkar observed that if the availability of capital constrains credit growth of the public sector banks, particularly those under the prompt corrective action (PCA) framework, it may hamper the ability of lower rated firms as well as SMEs to access adequate financing.

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, he said.

Lending rates to go up

ICRA, in a statement said, 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.

The year-on-year (YoY) CPI inflation prints, released since the last policy review, have provided a mixed trend, with a dip from 4.4 per cent in February 2018 to 4.3 per cent in March 2018, followed by a sharper-than-expected rise to 4.6 per cent in April 2018.

ICRA underscored that some of the risks highlighted by the MPC in their April 2018 policy review, have come to the fore, such as the substantial rise in global crude oil prices, accompanied by a depreciation of the Indian rupee. Moreover, the core CPI inflation has recorded a sharp uptick to a 44-month high of 5.9 per cent in April 2018, it added.

“Greater clarity is awaited on the level at which MSPs (minimum support price) are fixed for the upcoming kharif season, as well as the eventual volume and dispersion of the monsoons in 2018.

However, the momentum of the seasonal uptick in food prices continues to be dampened by the weakness in items such as sugar, pulses and onions,” said the agency’s statement. The decline in the CPI inflation from 4.5 per cent in FY2017 to 3.6 per cent in FY2018, was accompanied by one rate cut in 2017.

While the monthly CPI inflation prints are likely to remain volatile going forward, ICRA expects the average CPI inflation to rebound to 4.6 per cent in FY2019, which suggests an imminent rate hike in H2 (July-December) CY2018.

However, there is a low likelihood of immediate monetary tightening in the June 2018 policy review, as the prevailing lack of clarity on factors such as the 2018 monsoons, the MSPs and fiscal risks, are likely to evince varied responses from the MPC members.

“While the decision to leave the repo rate unchanged at 6 per cent in June 2018 is likely to be non-unanimous, the tone of the policy document is likely to signal that a withdrawal of accommodation and a rate hike could be imminent,” said ICRA.

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