June 6, 2018 / 9:35 AM / 2 months ago

Expert Views: RBI hikes policy rate to 6.25 percent, keeps stance 'neutral'

BENGALURU (Reuters) - The Reserve Bank of India on Wednesday raised its policy rate for the first time in over four years, due to inflation concerns, and it surprised some analysts by keeping its policy stance as “neutral”.

FILE PHOTO: A man checks his phone outside the Reserve Bank of India (RBI) headquarters in Mumbai, India April 5, 2018. REUTERS/Francis Mascarenhas/File Photo

The central bank’s monetary policy committee lifted the repo rate by 25 basis points to 6.25 percent, the first increase since January 2014, as predicted by 46 percent of respondents in a Reuters poll this week. All six members on the rate panel voted for an increase.

The reverse repo rate was also raised by 25 basis points to 6.00 percent. Before Wednesday, the last policy rate change was a 25 bps cut in August 2017.

SHILAN SHAH, SENIOR INDIA ECONOMIST, CAPITAL ECONOMICS

“The rationale behind the rate hike stems largely from the outlook for inflation. In particular, core inflation has surged to a four-year high and the central bank noted several upside risks, including stronger domestic demand and higher inflation expectations.

“At the same time, however, the central bank sounded upbeat on the growth outlook following the recent run of positive activity data. With growth strengthening and core inflation picking up, we think today’s hike marks the start of a modest tightening cycle.”

ADITI NAYAR, VICE PRESIDENT, PRINCIPAL ECONOMIST, ICRA LIMITED, GURUGRAM

“The pre-emptive rate hike being accompanied by the maintenance of a “neutral” stance seems to be a clear signal that future rate action is likely to be data-dependent.”

ANITA GANDHI, WHOLE TIME DIRECTOR, ARIHANT CAPITAL MARKETS, MUMBAI

“The recent hike in crude prices and better GDP for the last quarter of FY18 suggest inflation trajectory may be on the higher side. Though, this may put some pressure on borrowers, it is positive news for the savers in the economy.”

SUDHAKAR PATTABIRAMAN, HEAD OF RESEARCH OPERATIONS AT WILLIAM O’NEIL’S MARKETSMITH, MUMBAI

“I was not expecting the hike to happen this month, but was expecting it in August. If the current trend of increasing inflation and oil prices continues, we expect another 25 bps hike somewhere during the year.

“The committee seems to be pretty clear that there should not be an effect from the rate hike on economic growth.

“If we talk about a series of rate hikes, with time economic growth will definitely slow down. Investments and sectors such as housing and construction will definitely slow down a bit, which will affect the GDP growth.

“Rate hikes alone cannot arrest the depreciation of the rupee. The RBI has taken a neutral stance. Some of the banks have already raised interest rates. Inflation and bond yields are on the rise. Considering all this, we were expecting them to be more hawkish. At this point, inflation is still within the Monetary Policy Committee’s range of 2-6 percent and growth rate is still in the early stages of recovery.

SUJAN HAJRA, CHIEF ECONOMIST AND EXECUTIVE DIRECTOR, ANAND RATHI SHARES AND STOCK BROKERS, MUMBAI

“During this calendar year, the Reserve Bank of India is unlikely to do any further rate hikes, and beyond that, it will be extremely data-dependant.

“With the normal monsoons, we don’t see much upside to oil prices from the current level, and also we expect the industrial production growth to falter after few months of pretty strong growth. We don’t see further strengthening of inflationary forces, but we see some weakening of growth parameters.

“The RBI has more direct tools if it really wants the rupee to move in a particular direction.

“Broadly speaking, having delivered a rate hike, the RBI thinks they are in a stable zone. I think for RBI, the outlook will be far more stable.”

SUMEDH DEORUKHKAR, SENIOR ECONOMIST, BBVA, HONG KONG

“Rate hike is pre-emptive and in line with the Reserve Bank of India’s neutral-to-hawkish policy tone. The RBI has sounded more sanguine over growth prospects going forward, while flagging upside risks to inflation, particularly emanating from higher crude oil prices and the wage-price setting process due to closure of output gap. 

“Expect one more rate hike before the end of calendar year 2018 if core inflation remains elevated despite some potential moderation in growth.

“Growth recovery, although uneven, remains on track. Higher rates will weigh on growth, but only with a lag. Foreign investors remain sanguine over India’s long-term growth story and the credible reform momentum over the recent years. The latest hike underscores RBI’s policy credibility in line with its inflation targeting regime.”

TANVEE GUPTA JAIN, CHIEF INDIA ECONOMIST, UBS SECURITIES INDIA PVT LTD, MUMBAI

“We were already pricing in a 40 pct probability of a rate hike in this policy, and 50 bps rate hike in FY19.

“We do expect one more rate hike by the Monetary Police Committee over the next few months, most likely in August, if oil prices continue to remain higher.

“After incorporating a 50-bps rate hike, and also assuming there will be tax cuts to be announced, we now expect GDP growth at 7.3 pct vs 7.4 pct in FY19.”

Reporting by Vishal Sridhar, Tanvi Mehta, Chris Thomas and Jessica Kuruthukulangara in Bengaluru, Editing by Sherry Jacob-Phillips

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