As the six wise members of Reserve Bank of India‘s Monetary Policy Committee spent two days brainstorming over a rate hike, the markets seemed divided on the decision, with a small section believing the central bank may hike rates 0.25% to keep inflation under control and global inflows into the country strong.
The RBI’s 14-day variable rate term repo auction was fully subscribed on Tuesday for the first time in the current fiscal, which led the market to believe that the government may be raising money before the rates sent up. The 14 day repo is a cash management bill which the government raises to meet temporary liquidity shortages.
The central bank’s 14-day variable rate term repo at auction Tuesday received bids worth Rs 29,305 crore against Rs 22,000 crore notified for auction.
However, the 14-day variable rate reverse repo auction Tuesday received bare subscription of Rs 300 crore against Rs 30,000 crore notified for auction.
But the majority believes that RBI will hold rates, but adopt a hawkish tone to prepare the market for a rate hike that seems certain in August.
The consumer price inflation (CPI) rose to 4.58% in April, reversing the softening trend in the preceding three months. Wholesale price inflation also touched a four month high of 3.18% in April on rising crude oil and food prices.
Since the last policy in April, oil prices have risen over 11-12%, the dollar index has climbed up 4%, while US yields have remained steady around 3% as the US economy showed signs of a strong revival. The MPC members will have to study these signals before they vote on Wednesday.
Bhaskar Panda, senior vice-president, treasury HDFC Bank, said, “There is a minor group that expects a rate hike and a dovish tone, while others expect no rate hike, but a hawkish tone as structurally inflation is inching up in India with government hiking rural spends and oil prices on the rise. Most of the developed economies are hiking rates and it is only a matter of time before we reach there. India is certainly heading for rate hikes but not necessarily in the June policy.”
The ten-year benchmark bond, which opened at 7.86% on Tuesday, cooled a bit to close at 7.82%.
The RBI led MPC held the rate at which the central bank lends overnight money to banks (repo rate) unchanged at 6% since June 2017 with a neutral stance with inflation remaining soft and growth uncertain.
A senior treasury head said, “There is a fear of a rate hike, but it’s only a minority view because the inflation has inched up since the April policy review. The dollar index has also improved and the US treasury yields are up.”
However Soumya Kanti Ghosh, chief economist, SBI, said in a report that rate hike fears are unfounded. “GDP numbers are strong, private consumption continues to lose pace dropping to 6.6% in FY18 from 7.3% in the previous year,” he said.
Though the CPI inflation has increased by 2.21 % since July 2017, core inflation has increased by only 0.98%.
“If we further dissect the core inflation data, we find that out of 0.98% of the increase, only two items have shown a substantial increase, which is housing (0.38%) and transport (0.21%) accounting for 60% of total core increase,” he said.