RBI could interject with a 25 basis points rate hike
Most reports coming out ahead of the June credit policy appear to be hinting at a status quo on rates. The RBI has been expressing concerns over prices but the Monetary Policy Committee (MPC) has generally veered towards a status quo on rates. However, June policy could be different for a variety of reasons. In fact, June could see the first rate hike by the RBI, although it may be just about 25 basis points. Here is why…
Read the MPC’s lips
The best way to get a perspective of the MPC’s thinking is to juxtapose the MPC minutes over the last 4 monetary policies. One thing comes out very clearly that there has been a gradual hawkishness that is creeping into the outlook of all the MPC members. While only Dr. Patra has been calling for a rate hike, other members have already started expressing concerns over the rising food inflation as well as dearer crude oil prices. Since the last monetary policy in April, the price of Brent Crude has gone up by past the $80/bbl mark. With 75% dependence on imported crude oil, this kind of a sharp rise in oil prices has the potential to import inflation from abroad and also result in downstream inflation. With supply from Iran constrained post the US sanctions and OPEC supply cuts continuing, the rising oil demand is putting pressure on oil prices. $100/bbl is not ruled out and that could be one reason for the RBI to seriously consider a rate hike in June.
Caution ahead of Kharif
The Met Department has already predicted a normal monsoon although the spread of rainfall will only be evident by June. However, the bigger issue is that the assured Minimum Support Price (MSP) at 150% of the cost of production will have two effects. Firstly, the higher MSP will automatically push food prices higher in the coming months and a food shortfall could only worsen the situation. Secondly, the higher MSP will result in higher rural income and rural spending. This will cause greater demand-pull inflation and will be largely driven by the rural and semi-urban areas. As a measure of caution, the government may want to slice away the froth that may be created by higher rural incomes. One way to do it would be through a repo rate hike in June.
Prepare for 25 bps hike
Traders and investors must not get too sanguine about status quo on rates. In fact, if you add up the potential impact of food prices and crude oil on inflation, there is a very strong reason for a rate hike in June. CPI inflation for April has come in higher at 4.58% and that is likely to get beyond the 5% mark in the coming months. One can expect the votes gradually veering more towards a rate hike in the next MPC meet. The RBI may also consider it an appropriate time to bite the bullet. Get ready for a 25 basis points hike in June 2018! ©