Another interest rate hike is on the cards in India as the central bank tries to rein in inflation and shore up Asia\u2019s weakest major currency.<\/p>\n
The Reserve Bank of India will probably increase the repurchase rate by 25 basis points to a two-year high of 6.5% on Wednesday, according to 39 of the 52 economists in a Bloomberg survey, with the rest expecting no change.<\/p>\n
A rate move will follow June\u2019s surprise 25 basis-point hike, when the RBI tightened policy for the first time since 2014, following counterparts in Indonesia and the Philippines in stepping up action to counter an emerging-market rout triggered by higher US rates and a stronger dollar. The rupee is down almost 7% against the dollar this year.<\/p>\n
Sticky core
\nInflation has been accelerating sharply this year, reaching 5% in June, on the back of a weak rupee and higher oil, India\u2019s biggest import item. With the government offering higher prices to buy some crops from farmers, price pressures are expected to strengthen in the second half of the fiscal year.<\/p>\n
As the economy strengthens, there are signs that demand pressures are stoking inflation. Core-price growth — which strips out volatile food, fuel and light prices — has been sticky at a four-year high of more than 6 percent.<\/p>\n
\u201cConsidering that demand-pull pressures on inflation are gaining traction, even as cost-push pressures from higher oil prices remain elevated, and that growth recovery may now be gaining momentum on improving demand, another rate hike of 25 basis points, is our base case scenario,\u201d said Gaurav Kapur, chief economist at IndusInd Bank Ltd. in Mumbai.<\/p>\n
Pipeline prices indicate inflation will remain under pressure. Wholesale prices quickened to 5.77% in June, the highest since December 2013, while the RBI expects higher input prices to be passed on to consumers.<\/p>\n
Food prices
\nThe government recently increased the minimum support prices for summer crops, which UBS Group AG estimates will boost the inflation rate between 35-70 basis points, depending on the procurement policy. Added to that is the risk of a shortfall in monsoon rains, which could boost food costs further.<\/p>\n
The consensus forecast is for the Reserve Bank of India to raise rates again at its August review to contain inflation. We think it\u2019s already done enough, and expect it to hold. Risks to growth are increasing, and inflation is probably on a downward trajectory after peaking in June. With borrowing costs already on the rise, additional tightening would amplify the debt burden for businesses and inflict more damage on public banks\u2019 balance sheets — aggravating growth concerns.– Abhishek Gupta, Bloomberg Economics<\/p>\n
Strong growth
\nThe RBI is reasonably confident that the economy is rebounding from the twin shocks of a cash ban in 2016 and the chaotic implementation of a consumption tax in 2017. It expects the output gap to narrow in the coming months, which in turn will drive inflation higher.<\/p>\n
High frequency indicators from purchasing managers\u2019 surveys to auto sales data show the economy is likely to grow above 7%.
\n\u201cWith GST-related temporary disruption largely behind us, growth in the non-farm economy is picking up,\u201d IndusInd Bank\u2019s Kapur said. \u201cFirst-quarter corporate earnings data is also indicating a revival in consumption.\u201d<\/p>\n
Shifting stance
\nTraders are watching closely if the central bank shifts its stance to hawkish from neutral, a signal of more policy tightening in the months ahead. That would hit bonds in a market where 10-year yields surged above 8% in June for the first time in three years.<\/p>\n","protected":false},"excerpt":{"rendered":"
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