DBS Research expects the six-member Monetary Policy Committee (MPC) to sound hawkish and pre-emptively hike the repo rate by 25 basis points on June 6.
“We expect the Monetary Policy Committee to sound hawkish, with a rising probability that they will vote for a pre-emptive 25 basis points hike in June, to maintain financial stability and contain second round inflationary impact from higher oil prices and weaker rupee,” Radhika Rao, Economist at Singapore-headquartered DBS Group, said in a research note.
A likely move in June, may be followed by another 25 basis points in August/October taking the repo rate to 6.5 per cent by end 2018.
Liquidity route
In case the authorities prefer to go the liquidity route and buy time this month, then the hike might be delayed to August. “We look for total of 50 basis points hike in 2018,” said the DBS Research note. Slow progress on the banks’ bad asset resolution and a gradual turnaround in growth suggest that an aggressive hiking cycle is unlikely, it added.
DBS Research has also not ed that there has been limited communication from the central bank since the April policy meeting. This makes the policy review on June 6 important to gauge the Reserve Bank of India’s assessment of recent market volatility and hardening in borrowing costs.
Headline inflation is within the target, but the core is close to the upper band of 2-6 per cent target, requiring the central bank to act to reinforce its price stability mandate.
Apart from policy tweaks like the minimum support prices, sharp and quick uptrend in crude prices and rupee weakness risk hardening inflationary expectations. Secondly, the likelihood of a wider fiscal deficit, given risks of fuel excise duty cut (matter of ‘when’ not ‘if’), uncertainty over GST collections and softer divestment proceeds, is also a concern, the DBS Research note said.