The six-member monetary policy committee of the Reserve Bank of India (RBI), which is meeting for the last time in this financial year, is expected to maintain status quo for the third straight review meeting as retail inflation is hovering close to the central bank’s upper tolerance limit.
Consumer price index-based inflation or retail inflation — the central bank’s primary yardstick for setting interest rate — was 5.21% in December, just below the 6% upper band mandate of RBI. Rising food prices was one of the main reason behind this 17- month-high retail inflation.
Economists said there could be further pressure on inflation with rising oil prices and higher minimum support prices for the farmers, as promised in the Union Budget last week.
All these would mean RBI is holding the repo rate or the key policy rate at 6% with a hawkish tone, though the stance of the policy could continue to stay neutral. “RBI is likely to stay on hold on policy rates tomorrow, but expect a hawkish commentary,” said Abheek Barua, chief economist, HDFC Bank. “Rising oil prices, higher MSPs announced in the Budget and slight deviation in the fiscal consolidation path have increased the probability of higher rates in 2018-19. Bond yields expected to remain around current levels in the near term but trend towards 7.75% by September 2018,” he added.
Bond yields have been rising since the Budget was presented, and after the government missed the fiscal deficit target and pushed back the glide path of attaining the fiscal deficit target of 3% to 2020-21 as compared to 2018-19.
Next year’s fiscal deficit target of 3.3% is also under cloud as revenue projections are seen as optimistic.
Bonds sell off
“Budget FY19 triggered a sell-off in the Indian bond markets last week,” DBS economist Radhika Rao and Rates Strategist Eugene Leow said in a note to its clients.
“Optimistic revenue projections and concerns over the inflationary impact of budgetary measures weighed on sentiment. Higher fiscal targets for FY18-19, along with rising oil prices, are set to make the RBI’s policy path a tricky one this year,” the DBS note said. It added that RBI would flag the projected fiscal slippage, higher oil, and MSPs as risks to future inflation, but not as factors that warrant an imminent tightening.
Indranil Sengupta, economist at Bank of America Merrill Lynch, said while MPC may continue with ‘slightly’ hawkish pause in its review meeting on Wednesday, inflation risks are overdone as vegetable prices have started falling.
