Brace for another rate hike as inflation trends higher

Last Updated: Thu, Jun 14, 2018 15:23 hrs
A shopper carries a basket in a supermarket in London

Mumbai: Though many expected the central bank to hike rates in its monetary policy meeting in June 2018, there were several analysts who believed the bank might hold rates and consider a hike only in August. The central bank's Monetary Policy Committee decided to hike the repo rate by 25 basis points to 6.25% and it was reported that all the six members of the committee were in favour of the hike.

After that hike, the first in over four years, or, as is mentioned by everyone, the first during the current NDA rule, many economists and analysts were of the view that the bank would resort to another hike much later this year.

However, it now seems that another rate hike will happen in the foreseeable future, given the fact that inflation has climbed disturbingly higher, necessitating a swifter monetary tightening move from the apex bank.

The central bank, nevertheless voiced its concern about inflation during its last policy meet, citing higher crude oil prices and the wage-price setting process due to closure of output gap as potential upside risks to inflation.

However, regarding growth outlook, the apex bank sounded confident as it retained GDP growth for 2018-19 at 7.4%, the same as that of the first Bi-monthly monetary policy statement it came out with in April. The bank projects growth to be in the range of 7.5-7.6% in the April-September half and 7.3-7.4% in the second half of current fiscal.

According to the data released by the government on Tuesday, India's retail inflation rose for the seventh straight month, accelerating to 4.87%, a four-month high, due to higher fuel prices and a weakening rupee. That was much higher than the central bank's medium inflation target of 4%.

During its latest policy review, the RBI revised upward its inflation forecast to 4.7% for the second half of current financial year ending March 2018. Earlier, it had pegged it at 4.4%.

And now, the data on wholesale price inflation for May shows India's inflation to have risen to a 14-month high of 4.43%, up significantly from 3.18% in April. However, it is still notably lower than the 5.11% mark it had touched in March 2017.

While food articles inflation rose 1.6%, inflation in vegetables was up 2.51%. Fuel and power inflation was up sharply to 11.22% in May.

It now looks a 25 basis points hike in the repo rate is very likely on 1 August 2018.

With the U.S. Federal Reserve hiking interest rates yesterday and hinting at two more hikes this year, it is unlikely to be a smooth sailing for the stock market in the near term. Foreign investors are already busy selling almost consistently.

The pull-out by foreign investors and high crude oil prices will continue to keep the rupee under stress against the U.S. dollar and this does not augur well for the broad market. Information technology and pharmaceuticals stocks may see some bright spells in positive territory, but the overall sentiment in the market may stay a bit cautious.

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