A rate hike is almost certain. It is likely to be a quarter percentage (increase in repo rate) but the probability of a 50 bps increase is not ruled out,” said Saugata Bhattacharya, Chief Economist at Axis Bank.
Retail inflation had declined for the first time in 2018 at 3.69 percent in August compared to 4.17 percent in July.
However, core inflation is rising because of increasing fuel prices and now with the MSP (minimum support price hike in the rabi crops and the rising crude oil prices, it will add to core inflation.
After the government cut excise duty on petrol and diesel prices, India Ratings’ estimates, suggested that the tax cut will translate in a 3.79 percent decline in the retail prices of petrol and a 3.88 percent decline in the retail price of diesel, based on prices and taxes prevailing in Delhi.
However, “…there are signs of rising demand and pricing power will also get affected in H2 of FY19 (October to March). So my sense is 25 bps with a hawkish language,” Bhattacharya added.
To be sure, the objective of monetary policy framework is to primarily maintain price stability, while keeping in mind the objective of growth.
The MPC is guided by a legislative mandate to maintain the consumer price index retail inflation rate at an average rate of four percent with a band of +/- 2 percent.
However, having factored in a repo rate hike already, the market would be looking for outlook going forward and its guidance on the central bank’s actions on stemming the Indian rupee’s free fall over the last few weeks and the liquidity crisis plaguing the non-banking financial companies (NBFCs).
They are witnessing higher refinancing rates that could lead to compression in its margins.
Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mahindra Asset Management, said: “The MPC meeting is happening at time when a tale of two Cs is unfolding – crude oil prices and currency. The INR (Indian Rupee) has depreciated almost 7 percent since last policy while crude oil prices are up by over 17 percent. This clearly is a double whammy for and net oil importer nation like India.”
