RBI may hike rates again on July 26, say economists

N. S. Vageesh Updated - March 12, 2018 at 11:56 AM.

Despite lower IIP numbers, inflation a major worry still

Economists think that despite the lower industrial production numbers released today, inflation continues to remain the major issue and the Reserve Bank of India will continue with its interest rate hikes for some more time.

Industrial production in May reflected by the Index of Industrial Production (IIP) numbers released today showed that it had moderated to 5.6 per cent year-on-year compared with 5.8 per cent y-o-y in April. Consensus estimates of IIP growth were closer to 8 per cent.

The lower industrial numbers will, however, have little impact on the tightening cycle of the RBI, say economists. The next hike is expected on July 26 during the RBI's quarterly review of its monetary policy.

Analysts '
view

Mr Leif Lybecker Eskesen, HSBC's Chief Economist for India & ASEAN said in a note, “Industrial production growth unexpectedly slowed to 5.6 per cent y-o-y in May vis a vis a downwardly revised 5.8 per cent in April. This was well below consensus estimate of 8.5 per cent and our optimistic call of 9.4 per cent. Growth is moderating in response to monetary tightening, the uncertainty associated with elevated inflation, and tight capacity. Still, inflation will remain RBI's primary concern, with a 25 bps hike in the repo rate expected on July 26.”

He added, “While the May reading for industrial production growth was much lower than expected, it is too early to panic. For one, this series can be quite volatile and, especially, the capital goods component. Second, while the PMI readings for manufacturing also point to an easing in the momentum, it still shows positive sequential growth and only points to a moderation in the pace of expansion. Finally, the PMI reading for the services sector showed a pick up in momentum in June and non-food private credit growth remained strong in April-May. “

He wrote, “With growth moderating and not collapsing, the RBI's primary concern remains inflation and we expect Thursday's WPI reading to confirm this. Consequently, the RBI will continue to tighten policy rates, taking rates up a total of 75 bps this fiscal year and delivering the next strike on July 26 with 25 bps. This will bring the policy (repo) rate to 8.25 per cent, above the neutral rate. This is necessary to slow growth sufficiently to ease the underlying demand-led inflation pressures.”

According to Mr Indranil Pan, Chief Economist, Kotak Mahindra Bank, “Inflation still continues to be a worry for the Indian economy and we expect the June number to print at around 9.9 per cent. However, the RBI can’t be aggressive with its monetary tightening cycle from now on as global risks appear to have increased significantly over the past month.”

Ms Deepali Bhargava, Economist, ING Vysya Bank, said, “We do not expect today’s IIP numbers to alter RBI’s anti-inflationary stance especially when the services’ sector leading indicators haven’t shown any material moderation. We continue to expect a cumulative of another 50 bps hike in the repo rate by the RBI during the current financial year, the first 25 bps tranche of which is expected in the policy review meeting on July 26.”

Published on July 12, 2011 11:53