RBI: Rate hike coming? – Rabobank

Analysts at Rabobank suggest that the Monetary Policy Committee of the RBI again will decide on its most important policy rates today and as their India expert Hugo Erken notes, they have brought forward their expected hike in the April-June quarter and expect that the RBI will raise the repo rate to 6.25% and the reverse repo to 6% (admittedly we are the only one predicting this, so be warned!).

Key Quotes

“Inflation surged to 4.9% (y/ y) in November and 5.2% in December, up from 3.6% in October, zooming past the 4% medium-term target of the RBI. We were already quite pessimistic on rising inflation during the last MPC meeting in December and have anticipated a rate hike in the April-June quarter of 2018, but the current inflation trajectory surprised even our bearish expectations. Even if one keeps in mind that incidental factors propped up prices in November and December (such as unfavourable base effects and rapid price increases of certain food items), we expect more inflationary pressure on different fronts going forward.”

“The recent rise in Indian Treasury yields does not appear to be driven by domestic factors (such as the fiscal situation), but rather rising US yields. Capital outflows are always a risk for the Indian economy and together with higher oil prices these are external risks that might induce the RBI to start hiking rates from a precautionary point of view.”