Monetary Policy preview: Will the RBI hike interest rates tomorrow?

The Reserve Bank of India's (RBI’s) Monetary Policy Committee (MPC) will release its policy statement on Wednesday, August 1, 2018. Currently, the repo and reverse repo rates stand at 6.25 per cent and 6 per cent, respectively.

The policy comes amid rising inflation and a falling rupee. The widening current account deficit in an election year is also a key monitorable for the policymakers.

Recently, investment guru Mark Mobius also commented that the central bank will make a big mistake if it was to hike rates in August. Most economists in a Bloomberg News survey expect the Reserve Bank of India to raise the report rate by 25 basis points on August 1, a second hike in eight weeks. READ MORE HERE

So, will the RBI raise interest rates in its upcoming monetary policy review tomorrow? Here is what top research houses and brokerages expect.

BofA Merrill Lynch

We believe that the RBI MPC will wait and watch on Wednesday - with a hawkish tone - after its June hike. If the monsoons are normal, it should be on a long hold. If, however, the east does not get sufficient rains, then the RBI MPC will likely hike 25 bps in October, although release of rice buffer stock will help far more than monetary tightening.

On our part, we would watch for the RBI's open market operations (OMO) plans ($50 billion if FPI flows do not revive) with durable liquidity contracting by about $10 billion to defend Rs 69/USD. We estimate that the RBI will have to sell $20 billion ($14 billion so far) if FPI flows do not turn around. It also remains to be seen if the RBI assures the FX market that NRI bonds (raising $30-35 billion BAMLe) are a policy option. The MoF has already done so.

Kotak Securities

We pencil in a repo rate of 25 bps in the August policy. The key reasons to hike are (1) headline inflation remains well above the 4% mark over the medium term, (2) core inflation remains sticky and high along with risks of higher input prices being passed on over the next few quarters, (3) announced MSP hikes and the risk of it percolating to food inflation (which also implies the RBI should revise its headline inflation marginally higher for 2HFY19), (4) concerns on INR remain, and (5) growth remains on a stronger footing implying that the output gap is fast closing in and can lead to inflationary pressures in the medium term. Even as we call for a rate hike, the RBI may pause mainly to wait-and-watch if MSP hikes start to percolate to food prices and how the inflationary expectations have evolved over the last quarter.

Emkay Global

With RBI rate decisions now being guided by inflation targeting objective, the recent pick-up in inflation momentum will see the central bank hiking repo rate by another 25 bps on August 1 to 6.50%.

With this, the RBI will move past the level last seen in October 2016 when it had adopted a ‘neutral’ stance, implying that the next rate hike will be the first move towards a ‘tightening’ stance in the current cycle. We now believe that with the sharp rise in both CPI and WPI inflation, RBI may do a cumulative tightening of more than 50 bps during the rest of FY19.

Retail (CPI) inflation continued to harden in June 2018, rising to 5.0% yoy, along with persistent rise in core inflation at 6.4%. WPI inflation is at 5-year high of 5.8% yoy, picking up way beyond CPI inflation due to a sharper rise in commodity inflation.