Rate hike by RBI likely as recovery is in nascent stage: Morgan Stanley

The Monetary Policy Committee's next move will likely be a rate hike but this will not be taken up immediately as a recovery is still at nascent stage, says a Morgan Stanley report.

According to the global financial services major, the inflation trajectory will hold the key towards determining when the central bank will likely hike interest rates.

"In this context and also from our read of the MPC statement and the minutes, while the next move is likely to be a rate hike, it is unlikely to be taken up immediately," Morgan Stanley said in a research note.

Morgan Stanley's base case assessment remains that "the RBI will hike in 4Q18. However, considering that we see upside risks to our inflation forecasts, the risks are also tilting towards an earlier-than-expected rate hike," it added.

As per the MPC minutes, a number of factors will put upward pressures on the inflation outlook. These factors are staggered HRA implementation by the states, MSP rises as announced in the budget, elevated inflation expectations, custom duty increases, further hardening of oil prices and increase in input costs.

"A sustained rise in core inflation to above 4.5 per cent or the materialisation of further upside risks to inflation would likely prompt the central bank to hike rates," it added.

Moreover, five out of the six MPC members flagged their concerns at the potential impact that fiscal policy would have on the inflation outlook.

The Reserve Bank kept the key policy rate unchanged at 6 per cent for the third consecutive time on February 7 in view of firming inflation.