Monday, 12 November, 2018


RBI expected to raise rates again

RBI snip 2 RBI expected to raise rates again
Conrad Doyle | 05 August, 2018, 19:46

"It's very unlikely that the conditions over the next six to eight months will warrant another move in monetary policy", said Dean Turner, U.K. economist at UBS Wealth Management.

Accordingly, the RBI hiked the key repo or short-term lending rate by 25 basis points to 6.50 per cent, while the reverse repo rate was adjusted to 6.25 per cent and the bank rate to 6.75 per cent.

RBI also raised the inflation projection to 4.6 per cent in second quarter of fiscal 2019, 4.8 per cent in second half of 2018-19 and 5 per cent in first quarter of 2019-20.

"The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis", the RBI said.

Kathleen Brooks said that one of the main things to look for will be the "mechanics of the rate decision", particularly with regard to how the vote goes in terms of who votes for what.

In its accompanying quarterly inflation report, the Bank kept its forecast for growth this year unchanged at 1.4%, but increased the outlook for 2019 to 1.8% from the 1.7% previously predicted.

Given that a rate hike is nearly a foregone conclusion, other parts of the MPC's decisions, and the minutes of the meeting are likely to provide more intrigue.

Ahead of the RBI's monetary policy announcement, the country's largest lender State Bank of India (SBI) had hiked interest rate on fixed deposits by up to 0.1% on select maturities, a move likely to be followed by other banks. For the RBI, inflation is the central concern.

With expectations of a rate hike nearly entirely priced into the market, investors are mostly focused on what message the Monetary Policy Committee sends on Thursday about its intentions for further increases in borrowing costs.

In its meeting, the MPC agreed that the economic dip in the first quarter was temporary, with momentum recovering in Q2.

After delivering the first back-to-back rate increase since it was set up in September 2016, the MPC warned that "rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity".

"In the MPC's latest expectations, conditioned on the gently rising path of interest rates implied by the market yield curve, United Kingdom demand is expected to grow at around its current pace".

Wraith doesn't believe that such data will stop the Bank of England from hiking rates but believes it should, particularly when considering that this behaviour is going against the bank's own forecasts.

Wednesday's decision is "likely to be a close call, with odds of a hike marginally higher than a pause", said DBS economist Radhika Rao.

RBI had increased rate by 25 bps in the previous policy review after four-and-a-half years.

"The MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of European Union withdrawal".

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