Goldman Sachs expects RBI to keep policy rates on hold at June meeting

Goldman Sachs Research expects the RBI to keep policy rates on hold at its meeting on June 4-6, but shift to a hawkish tone.

The central bank will likely begin hiking policy rates in August, Goldman Sachs Economics Research said in its latest report.

“Although better activity data, higher inflation, and rising crude oil prices all point towards a more hawkish RBI and could warrant a policy rate hike, we think the RBI will await clarity on minimum support price (MSP) hikes for summer crops, the monsoon, and more inflation data before embarking on a rate-hiking cycle,” the report said.

However, it also highlighted that the probability of a June hike would increase if global oil prices rise further, or the rupee depreciates significantly ahead of the June meeting.

But why the hawkish tone?

First, India’s activity growth data have been gradually improving over the past few months. Growth has remained above the 8 per cent mark for four consecutive months for the first time in seven years.

The current activity indicator suggests the economy grew 8.3 per cent year-on-year in April 2018.

Second, headline inflation has bottomed and will likely rise over the coming months.

“We think the moderation in inflation that we saw in Q1 was likely temporary, and continue to expect headline inflation to rise back up to 5 per cent y-o-y in the next two months and beyond 5.5 per cent y-o-y in Q3 — a trend that will likely warrant a more hawkish RBI,” the report said.

Third, the rise in global crude price poses risks to India’s current account deficit.

Fourth, the April monetary policy meeting minutes showed certain MPC members shifting towards a relatively more hawkish stance, raising concerns about the rise in core inflation.

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