NEW DELHI: When March quarter GDP print delighted investors on Thursday, some economists were busy counting the next headwind: an interest rate hike.Some see it coming as early as next week in June money policy review, while some others expect it in August.
When it happens, it would increase cost of borrowing for Indian industry, which has been struggling to borrow from banks made conservative by large bad loans and which is still trying to put the demand-supply matrix in order after a major tax overhaul.Higher cost of money can also dent consumer demand, which has just begun to look up following the twin impacts of a cash ban in 2016 and a major tax overhaul effected since July, 2017.A spike in crude oil prices has already lifted inflation projections.
RBIs April inflation projections had assumed a $68 a barrel price level for crude oil, which has since gone past $75.
On Friday, crude oil price stood at $77 a barrel, with uncertainty still looming over Venezuelas output and outages in Nigeria.Moodys Investors Services external vulnerability index, which measures external debt of a nation against its reserves, stood at 74 per cent for India, signalling higher risk compared with, say, Indonesia, for whom it was at 51 per cent.Indonesia, which has a large population and runs a high current account deficit (CAD), just like India, hiked interest rates twice in last one month.Indias rupee has depreciated 3.5 per cent against the US dollar since April 1, and 7 per cent for the year to date.
This ties down RBI to tighten its stance, taking cues from Indonesia and Turkey, said Kotak Institutional Equities.
Turkey raised interest rates last week by a massive 300 basis points.
A weak currency tends to stoke inflation, and central banks try to fight back by raising interest rates.At high oil prices, Indias high consolidated gross fiscal deficit-to-GDP ratio and current account deficit-to-GDP ratio could make it vulnerable to the negative sentiment seen in other emerging markets.However, Indias low external debt-to-GDP ratio and high import cover may prevent any meaningful negative impact.India will face internal issues in the form of higher inflation and possibly weaker growth due to high oil prices, said the Kotak report.Brokerage UBS has assigned a 40 per cent probability that RBIs MPC will pre-emptively hike rates by 25bps at June review.The tone of the policy statement will remain hawkish.
Minutes of RBIs April meeting suggest two of the six MPC members have already decided to vote in favour of a 25 basis points hike, UBS noted.We do not rule out policy rate increases by RBI as it combats the twin issues of higher-than-projected inflation on the back of high oil prices and a weaker rupee, Kotak said.
Indias GDP numbers released on Thursday could have made the case stronger for a rate hike.
At 7.7 per cent, the fourth quarter GDP growth was highest in seven quarters.The data supports view that growth is on an up cycle, at least in the short term, said Nirmal Bang Institutional Equities.
This brokerage pegs FY19 GDP growth estimate at 7.5 per cent.
With recovery also supportive of a rate hike, the brokerage expects a 25 bps rate hike in August.