INSUBCONTINENT EXCLUSIVE:
The Reserve Bank of India hiked the repo rate by 25bps in the June policy, in line with our expectations, but surprisingly did not make any
This is the first rate hike in over four years.
CPI inflation forecast was revised (to 4.8-4.9 per cent in 1HFY19 and to 4.7 per cent in
2HFY19; from 4.7-5.1 per cent in 1H and 4.4 per cent in 2H) up for 2HFY19, to reflect risks from potential higher increase in minimum
support prices (MSPs), rupee depreciation, fiscal slippage and higher oil prices
Given the faster than anticipated pickup in growth momentum, RBI, unsurprisingly was worried about the core inflation trend and its likely
impact on inflation expectations of households which has already recorded a significant increase, as per the latest reading (after remaining
just below 9 per cent for more than a year)
Indeed, the central bank explicitly stated that the rising momentum of core inflation (CPI excluding food, fuel and HRA) has imparted
persistence into higher CPI projections in FY19
Our CPI inflation forecast for FY19 is 4.6 per cent, with risks tilted to the upside.
FY19 growth forecast (7.4 per cent; Deutsche Bank
estimate also 7.4 per cent) was kept unchanged, as expected, with RBI pointing out that output gap has almost closed
The central bank stated that investment activity is expected to remain robust, even with tightening of financial conditions in recent months
We agree with this outlook, as we see signs of revival in investment activity, which we expect to sustain and accelerate over the next
We expect growth to peak around 7.8-7.9 per cent in April-June and then ease gradually to 7.3 per cent in July-Sep, and further to about 7
per cent average in 2HFY19 (vs
preferred to retain a degree of freedom by not changing the neutral stance in the June policy
That will provide flexibility to the central bank to react, depending on how the global and domestic data pan out over the next couple of
when it meets next on August 1
We will look forward to the MPC minutes (to be released on 20th June) to get a confirmation of the same.
We see core inflation heading above
6 per cent in May and remaining elevated till August, thereafter moderating gradually to 5.0 per cent by the end of March 2019
The pressure on rupee has abated somewhat for the time being but may resurface and a potential sizable increase in MSP prices (announcement
likely in mid-June) is likely to keep RBI worried about the medium-term food inflation outlook
Add to this, a rising current account deficit (likely to widen to 2.5 per cent of GDP in FY19 as per our estimates) and persisting outflows
from offshore debt investors, in the backdrop of more rate hikes expected from the US Federal Reserve, the case for a rate hike in August,
seems quite reasonable.
If oil prices collapse below $70/barrel and/or inflation/ MSP developments surprise sharply to the downside in the
interim, then RBI could consider pushing the next rate hike to October or December, otherwise one more 25bps rate hike looks likely on
sustain +1.75 per cent average real rates over the next 12 months
as it will help to preserve and strengthen macro stability, without which sustaining high growth becomes challenging
