Reserve Bank is likely to keep policy rates unchanged in the forthcoming monetary policy review, but will have a hawkish tone on concerns over inflation and as crude oil prices remain elevated, according to a report.
Retail inflation moved up to 4.58 per cent in April from 4.28 per cent in March. It was at 2.99 per cent in April last year.
The Reserve Bank will announce it's second bi-monthly monetary policy on June 6.
"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 out-turns, and more inflation data before embarking on a rate hiking cycle," Goldman Sachs said in a report here today.
The probability of a June hike would increase if international oil prices rise further, or the rupee depreciates significantly ahead of the June meeting.
The report said the RBI will likely begin hiking policy rates in August this year.
The key downside surprise this year has been the developments in the banking sector (Punjab National Bank fraud, higher-than-expected haircuts on existing non-performing loans), which led us to reduce our FY19 real GDP growth forecast by 40 basis points earlier this year.
"We continue to think that the bank recapitalisation programme will help kick-start a powerful positive impulse between credit and investment growth, boosting overall activity growth in the second half of the fiscal year," it said. The report said headline inflation has bottomed and will likely rise over the coming months.
Headline inflation had moderated to 4.3 per cent y-o-y in March 2018 from 5.2 per cent in December 2017, leading the RBI to lower its headline inflation forecasts by 40-50 basis points at its April monetary policy meeting.
It forecasts FY19 headline CPI inflation to average 5.3 per cent y-o-y.
"The recent spike in oil prices following the withdrawal of the US from the Iran nuclear deal poses additional upside risks to our headline inflation forecasts," the report said.
While fiscal slippage risks appear to be priced into bond and currency markets, higher oil prices are less factored in, it said.
The report sees FY19 current account deficit at 2.4 per cent of GDP, but expects the economy to be able to withstand external shocks better than it did in 2013 around the taper tantrum.