INSUBCONTINENT EXCLUSIVE:
By Aditi NayarYear-on-year (YoY) CPI inflation prints, released since the April 2018 money policy review, have thrown up a mixed trend, with
inflation easing from 4.4 per cent in February 2018 to 4.3 per cent in March 2018, and then reversing to 4.6 per cent in April 2018
Additionally, core CPI inflation hardened to a 44-month high of 5.9 per cent in April, 2018.
Some of the risks highlighted by the Monetary
Policy Committee (MPC) in the April 2018 policy review have come to the forefront, particularly the surge in global crude oil prices,
accompanied by a weakening of the Indian rupee.
However, the momentum of the seasonal rise in food prices continues to be weakened by items
such as sugar, pulses and onions
Additionally, greater clarity is awaited on various factors, which can influence the inflation trajectory going forward, such as the level
of minimum support prices (MSPs) for kharif crops, and the volume and dispersion of monsoon rainfall in 2018.
The decline in CPI inflation
from 4.5 per cent in FY2017 to 3.6 per cent in FY2018 was accompanied by one rate cut in 2017
While monthly CPI inflation prints are likely to remain volatile going forward, we expect average CPI inflation to rebound to 4.6 per cent
This, in conjunction with the higher-than-anticipated GDP expansion in Q4 of FY2018, suggests an imminent rate hike in H2 of
CY2018.
However, we expect a limited likelihood of monetary tightening this policy review, as lack of clarity on the aforesaid factors such
as monsoon, MSPs as well as fiscal risks is likely to generate varied responses from the MPC members.
While a decision to leave the repo
rate unchanged at 6 per cent is likely to be non-unanimous this time around, the tone of the policy document is likely to signal that a
withdrawal of accommodation and a rate hike would be forthcoming.
Domestic bond yields have hardened considerably in recent months, in line
with global trends, the decline in systemic liquidity surplus and a rise in fiscal and inflationary risks
In addition to this, the eventual monetary tightening in 2018 may push up bank lending rates, suggesting that interest costs are likely to
rise this financial year.
We expect RBI to reiterate its stance of maintaining systemic liquidity closer to neutrality in the forthcoming
RBI conducted an open market operation (OMO) to purchase Rs 100 billion of G-sec on May 17, 2018
purchases by RBI to range between Rs 600-1,000 billion in FY2019
This should help dampen bond yields to some extent, even if the repo rate is eventually hiked by the MPC in the second half of
CY2018.
(Aditi Nayar is Principal Economist, ICRA)
