India: One rate hike delivered, one more in August? – Standard Chartered

Analysts at Standard Chartered explains that India’s Monetary Policy Committee (MPC) hiked the repo rate by 25bps to 6.25% in line with their expectations (consensus was for a hold) as they believe that higher crude oil prices, a weaker INR and a sharp increase in core-core inflation made a hike inevitable.

Key Quotes

“The surprise element was probably that all six members voted to hike, unlike the wide expectations of at least one non-RBI MPC member voting for a pause.”

“The MPC maintained a neutral stance and thus gave balanced forward guidance. While we had expected a switch in stance to withdrawal of accommodation we feel this is nevertheless appropriate at the current juncture. We note that the domestic growth recovery is likely to remain gradual in FY19 (ends March 2019) amid the slow resolution of twin balance-sheet issues and lingering uncertainty over crude oil prices, financial market volatility, trade tensions and geopolitical tension. Therefore the MPC’s preference to maintain some flexibility is not surprising.”

“Additionally, as the rate-hiking cycle is likely to be shallow – we expect one more 25bps hike in August and then a pause – a switch to a tightening stance was not needed. Such a shift could have built up expectations of a series of hikes, not warranted by the current macroeconomic environment. The MPC believes that a neutral stance leaves all options on the table: recall that the MPC reduced rates by 25bps in August 2017 even as it maintained a neutral stance.”

“The MPC remains vigilant about upside risks to its upwardly revised FY19 inflation projection of 4.8% (previously c.4.6%). It has cited upside risks from an increase in household inflationary expectations, the impending minimum support price (MSP) announcement, increased input price pressure that could feed into wages, crude oil prices, and potential spill-over from house rent allowance.”

“We will monitor these factors closely to assess the timing and size of a future hike. Impending procurement price increases and the monsoon performance will be crucial. Importantly, the minutes of today’s meeting, to be released on 20 June, will shed more light on the thinking of individual MPC members.”