Home Market RBI minutes: A rate hike might just be round the corner

RBI minutes: A rate hike might just be round the corner


Mumbai: A hike in interest rates might just be round the corner going by the minutes of the Monetary Policy Committee (MPC) released on Thursday. The common concern is the impact on inflation of the proposed hike in minimum support prices, fiscal concerns and the lagged impact of house rent allowances as recommended by the pay commission. Besides, all acknowledge some revival in economic activity.

In his justification for a pause for policy rates, RBI deputy governor Viral Acharya indicated that in his next policy review, he might shift its neutral liquidity stance to a move towards withdrawal of accommodation, suggesting a possibility of a rate hike in the coming policies.

He calls for a need to separate “signal” from “noise” in the data suggesting that recent softening in inflation is largely due to softening of vegetable prices which in turn has been volatile and seasonal in nature. “This volatility is largely “noise” from an interest-rate setting perspective; this volatility is also not something amenable to monetary policy actions” Acharya said in his minutes.

The Reserve Banks MPC had in its April policy meeting had voted for a pause in its key policy rate, the repo rate which was kept unchanged at 6%. It forecast a higher growth for FY19 at 7.4% from 6.6% in FY18 and commitment to achieving the medium term target for headline inflation of 4% on a durable basis
Economists too are factoring a rate hike by the Reserve Bank of India.

“The minutes of the MPC's meeting have a distinctly hawkish tinge as compared to our reading of the statement itself” said Aditi Nayar, principal economist at ratings firm Icra. “While incoming data and policy decisions related to factors such as MSPs, excise on fuels and expenditure announcements remain critical, today's minutes suggest that a back-ended rate hike in 2018 remains a possibility, if headline inflation exceeds the trajectory set out by the MPC.” The bond yields hence are likely to harden in the immediate term.

Should the food situation turn adverse or overwhelm food management strategies, “we will have to deal with inflation testing the upper tolerance limit of the inflation band” said internal member of the MPC, Michael Patra, who was lone dissenter in his vote during the recent meeting on April 6th by voting for a 25 basis points hike in key policy rates.

Even governor Urjit Patel has been cautious in his assessment of inflation as inflation has moderated in recent months, several upside risks to inflation persist. Hence, I would like to wait for more data and watch how various risks to inflation evolve, going forward.

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