RBI may lean towards a rate hike on spike in crude price, inflation

The chances of an RBI rate hike will increase if international crude oil prices rise further or the rupee depreciates significantly. Graphic: Mint

Mumbai: With crude oil prices touching $80 per barrel and core inflation rising, economists have revised their expectations from the Reserve Bank of India (RBI), ahead of a crucial meeting of its monetary policy committee (MPC) on 4-6 June.

While some economists expect the MPC to assume a more hawkish tone, others expect a 25 basis points hike in key policy rates.

Minutes of MPC’s April meeting revealed how some members had signalled a more hawkish stance. Deputy governor Viral Acharya who called for this change in stance said he is likely to shift decisively to vote for a beginning of “withdrawal of accommodation” at the next meeting in June.

If indeed the RBI does effect a rate hike, it will trigger a series of lending rate increases by banks, pinching the politically important middle class and weakening the already lagging investment climate in the country.

According to Goldman Sachs, the RBI will shift its policy stance to a hawkish one, keeping key rates on hold.

However, chances of a rate hike will increase if international crude prices rise further or the rupee depreciates significantly.

“Although better activity data, higher inflation, and rising crude oil prices all point towards a more hawkish RBI and could warrant a policy rate hike, we think the RBI will await clarity on minimum support price (MSP) hikes for summer crops, monsoon outturns, and more inflation data before embarking on a rate hiking cycle,” said the foreign bank in its latest research report.

Yes Bank too, revised its stance to hawkish, tracking the changed stance in MPC’s April minutes.

“Current market volatility led by commodities implies a 25bps hike is certain in August. Risks, however, remain alive for another 25bps hike if the trajectory of commodity prices continues to rise,” Shubhada Rao, chief economist at Yes Bank, told Mint.

In the April policy, the RBI had pointed to several uncertainties surrounding the baseline inflation path.

This included the impact of the revised formula for minimum support prices (MSP) and staggered implementation of house rent allowance (HRA), volatility in crude oil prices, and the rise in input prices. It had also said that there are risks in case of further fiscal slippage and should the monsoon turn deficient.

RBI had projected inflation to remain between 4.7% and 5.1% in the first half of the financial year.

The latest data shows consumer inflation for the month of April rose to 4.58%, after slowing for three months, contrary to the expectation that it would touch 4.41%. Wholesale prices in April also touched a four-month high of 3.18% due to rising crude oil and food prices.