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Is this the last in the rate hike cycle? That is now the big question on everybody's mind. The RBI has surprised the market by giving a higher-than-expected 50 bps hike in repo rate. Prior to yesterday's Policy Review, there was a view emerging in some sections of the market that the RBI will hike rate by 25 bps and then pause, or at max the hike would be another 25 bps in the September meeting before the pause. Now that a 50 bps rate hike has been delivered, market participants would look forward to some clue or hint on whether this is the last or more rate hikes are to be expected.
To try and read the RBI's mind from the language of the Quarterly Review, the way going forward would depend on inflation. A change in stance will be motivated by sustainable downturn in inflation. It has also been stated that though growth is beginning to moderate, there is no sharp or broad-based slowdown yet. Combining these statements, we may conclude that data would play a larger role in the rate decisions going forward. Interpretation of the data is subjective; what is a ‘sustainable downturn' in inflation is a matter of debate and even a marginal variation in inflation would keep the market hooked in the run-up to the next meeting on September 16. Favourable base effect for inflation kicks in post September; the monthly WPI data for August would be released just before the next review on September 16; this data may surprise on the upside.
Risk factors
The risk factors regarding growth and inflation as delineated by the RBI are global commodity prices including crude, monsoon, managing the fiscal deficit at 4.6 per cent of GDP, etc. These factors keep the door open for further rate hikes going forward, for example, if crude oil were to shoot up significantly, RBI may be required to take rate action again. Then again, growth deceleration due to the lag effect of the rate hikes delivered so far cannot be ignored and at some point of time RBI would have to change to a 'balanced' approach between controlling inflation and promoting growth.
(The writer is Senior VP – Advisory Desk – Fixed Income, BNP Paribas Wealth Management)
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