Teresa at Nirmal Bang securities comments on Monetary Policy Committee “The minutes of the recent RBI policy suggest that the rate hike was implemented on the back of the hardening of core inflation, elevated crude oil prices,. hardening of inflation expectations, higher than normal increase in minimum support prices or MSP for kharif crops and factoring in the possibility of fiscal slippage. It was also supported by sustained domestic recovery despite considerable uncertainty on the global growth outlook. The consecutive rate hikes were intended to be both
pre-emptive and front loaded , and as described by Chetan Ghate akin to an ‘insurance policy’. There was also widespread acknowledgment that the actual impact of the MSP increase will depend on the implementation process, and hence difficult to estimate ex-ante. Nevertheless, none of the members seemed to suggest the possibility for further rate hikes in the immediate future. In fact, Dr. Michael Patra, noted the possibility of inflation softening in Q2FY19 before picking up again in the third quarter and fourth quarter. He also expected the softer prints in
Q2FY19 to lull inflation expectations. His preference was to reinforce the policy action that commenced in June with another policy rate increase and to allow the accumulated policy impulse to work its way through the economy, while maintaining a vigil on inflation. Dr. Acharya also echoed a similar sentiment by suggesting that transmission will occur with a lag. Consequently, we expect the RBI to keep key policy rates on hold at the next couple of meetings. With inflation likely to hit 5% again by the end of FY19 or Q1FY20, we expect one more rate hike probably in
early FY20”.
My view: Rupee volatility will decide the extent of rate hike. Fundamentally what Teresa has written makes sense but at the time when capital flows are not favoring Emerging Markets, India needs to raise rates more than warranted just to make local assets more attractive and stabilize currency. That also means , growth will most certainly be sacrificed to maintain the financial stability.