The Reserve Bank of India (RBI) is likely to keep its policy repo rate on hold, awaiting more clarity on the out-turn of monsoon, the impact of revisions in the minimum support prices for kharif crops, volatility in oil prices on inflation, and the possibility of fiscal slippage.

However, the policy stance could turn from neutral to hawkish, indicating a rise in policy rates in the next few months.

Repo rate

The Monetary Policy Committee (MPC), headed by RBI Governor Urjit Patel, is slated to meet from June 4 to 6 for the second bi-monthly monetary policy statement for 2018-19. The policy repo rate is currently at 6 per cent.

The RBI last cut this rate from 6.25 per cent to 6 per cent in August 2017.

“It is too premature to hike the repo rate. But the statement they (the Monetary Policy Committee) make may indicate a hike shortly because the Government Security (G-Sec) rates have moved up a bit,” said Rajkiran Rai G, Managing Director and CEO, Union Bank of India. “The difference between RBI (repo) rate (6 per cent) and the G-Sec rate (the 10-year yield is at 7.85 per cent) is more than 180 basis points now. So, they may not be able to hold it for a long time.”

Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, points out that while GDP numbers are strong (7.7 per cent in the fourth quarter of FY2018), private consumption continues to lose pace, dropping to 6.6 per cent in FY18 from 7.3 per cent in the previous year. “In fact, the per capita private final consumption expenditure has decelerated... This calls for caution... In a nutshell, these are still early signs of an impending recovery and all care should be taken to support it and not derail it,” said Ghosh.

In the Ecowrap report, SBI’s research team underscored that though consumer price index (CPI) based inflation has increased by 221 basis points since July 2017, core inflation has increased by only 98 basis points.

The CPI inflation rose to 4.6 per cent in April 2018 from 4.3 per cent in March. The core CPI inflation jumped to a 44-month high of 5.9 per cent in April.

R Sivakumar, Head - Fixed Income, Axis Mutual Fund, said: “Our own expectation is that the RBI won’t do anything. It continues to look at the upside risks which are there to inflation, including oil, minimum support price revisions, potential fiscal slippage, global dollar strength and emerging markets weakness.

Radhika Rao, Economist, DBS, said she expects the MPC committee to sound hawkish, with a rising probability that they will vote for a pre-emptive 25-basis-point rate hike in the upcoming policy meeting.

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