Informist, Thursday, May 19, 2022

By Richard Fargose and Aaryan Khanna

MUMBAI/NEW DELHI – The Monetary Policy Committee is expected to follow up its hefty rate hike this month with a similar action in June as minutes of its latest meeting show that most members are in a hurry to anchor inflation expectations by frontloading rate hikes.

According to a poll of 16 economists and treasury officials, a majority of participants expect the rate-setting panel to hike repo rate by around 50 basis points at the Jun 6-8 policy meeting and to raise the rate further to 5.15% by August.

"The minutes show that inflation concerns are still unanimously central to policy deliberations, and that members are also all concerned by the recent elevated inflation trend," Rahul Bajoria, economist with Barclays, said in a note.

Data released last week showed annual inflation rate in April based on Consumer Price Index rose to a near eight-year high of 7.79%. April was the fourth consecutive month inflation rate topped the upper bound of the RBI's medium-term target range of 2-6%.

RBI Governor Shaktikanta Das said in his statement that heightened uncertainty and volatile financial markets could add to such unhinging of expectations. Most poll respondents, therefore, see the central bank attacking inflation with double-barrelled rate hikes of at least 75 bps cumulatively over June and August.

Such a move would push the repo rate to 5.15%, the level that prevailed before the onset of the COVID-19 pandemic in March 2020.

"It is clear...that the RBI's first priority is to reverse the 115 bps repo rate cut delivered during the pandemic as quickly as possible and then take a calibrated rate hiking approach post that," Deutsche Bank's Chief India Economist Kaushik Das said in a note.

With the MPC playing catch-up with the inflationary pressures it has been ignoring for a while now, some members may push for tighter measures later in the year, poll respondents said. Some market participants including Edelweiss Mutual Fund do not see the MPC shying away from a further 50 bps hike in August, pushing the repo rate to 5.40%.

BEYOND AUGUST

In the phase of policy normalisation beyond August, the path for further rate adjustments will depend on the inflation trajectory and other macro-economic factors, analysts said.

Madhavi Arora, lead economist at Emkay Global Financial Services, said that the front-loaded rate-hiking cycle does not imply a lengthy tightening cycle, a view echoed by Barclays' Bajoria. Once the MPC reaches the supposed neutral pre-COVID monetary conditions, the bar for further tightening incrementally may be higher amid increasing growth-inflation tradeoffs, she said.

"When it is done, we will have reached a stage of neutral accommodation – in contrast to extraordinary pandemic time accommodation – from where the next stage responses can be calibrated," RBI Deputy Governor Michael Patra said in the MPC minutes.

On the other hand, Deutsche Bank expects the MPC to continue hiking rates, though at a more benign pace, until Jul-Sep 2023 to tamp down the second-order effects of inflation, which Patra flagged in his comments.

SUPPLEMENTARY MEASURES

Some respondents also expect a 50 bps hike in the cash reserve ratio that the central bank may enact outside the MPC meeting, to complement the 50 bps hike that Das has already announced at the off-cycle meet on May 4.

"Fighting supply side inflation with interest rates would require support from RBI's liquidity management policy as well as supply side interventions from the government on food and fuel," QuantEco Research said in a note.

The following table gives the expectations of banks, brokerage firms and think tanks from the June meeting of the Monetary Policy Committee after the MPC minutes for May:

Mode: 50 bps

End

Edited by Ashish Shirke

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