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MPC minutes hint at more rate hikes soon


Mumbai: Investors may have to brace for a steeper and a quicker interest rate increase by the Reserve Bank of India with a member of the rate setting committee suggesting a percentage point increase ‘soon’ to tame inflation after a shock out-of-cycle hike earlier this month.

Price stability became top priority for the Reserve Bank of India (RBI), with inflation risks becoming more pronounced since the Monetary Policy Committee’s (MPC) last scheduled meeting in April and trumping concerns over broader economic growth, the latest minutes of the MPC published Wednesday showed.

The RBI raised policy rates for the first time in three years earlier this month, raising 40 basis points the rate at which it lends to commercial banks. One basis point is 0.01%.

“The worsening outlook of inflation warrants timely action to forestall second-round effects that could lead to unanchoring of inflation expectations,” Governor Shaktikanta Das was quoted saying in the minutes. “Heightened uncertainty and volatile financial markets could also add to such unhinging of expectations. Accordingly, a decisive and measured monetary policy response is necessary to avoid any unintended shocks to the economy.”

Improving contact-intensive services amid revival in urban demand is driving personal consumption. The outlook for agriculture remains positive in the wake of a normal southwest monsoon forecast, potentially supporting rural consumption.

“The rebound in domestic economic activity is gradually getting generalised,” Das said.

A higher inflation print also adds to the risk of a negative real rate.

“In view of a reasonable recovery and the sharp rise in inflation, frontloading of rate hikes is required to prevent the real rate becoming too negative,” said Ashima Goyal, professor at Indira Gandhi Institute of Development Research, and a member of the rate panel. “Among risks from negative real interest rates include households buying gold, thus aggravating the current account deficit and hurting financial intermediation.”

Justifying the timing of the RBI’s rate action, the governor said the war in Europe is now expected to last much longer than earlier anticipated. April inflation was expected to be further elevated, at an eight-year high of 7.79%, way above the target band of 2-6%.

“Hence it was necessary to act through an off-cycle policy meeting. Waiting for one month until the June MPC would mean losing that much time while war-related inflationary pressures accentuated,” Das was quoted as saying. “Further, it may necessitate a much stronger action in the June MPC, which is avoidable.”

External member Jayanth Varma, professor at IIM, Ahmedabad, hinted at sharper rate increases soon, saying there is a lot of catching up to do as the MPC prioritised economic recovery at the height of the pandemic.

“It appears to me that more than 100 basis points of rate increases need to be carried out very soon,” Varma was quoted as saying in the minutes.

Analysts, too expect rates to climb.

“More frontloaded rate hikes appear to be on their way, with the MPC keen, in our view, to take the repo rate to its pre-pandemic level of 5.15% (from 4.40%) soon. External MPC members Jayant Varma noted that ‘more than 100bps of rate increases need to be carried out very soon (i.e. 60bps more).’ While it is not clear whether the next 75bps worth of hikes will be delivered in one shot (June) or over two meetings (June/August), Dr. Varma’s “very soon” suggests to us a 75bps hike in June is live, and anything between 35bps and 75bps is possible,” Nomura Securities said in a note.

“Overall, the minutes confirm our view that policy is behind the curve and has to significantly catch up via frontloaded rate hikes. We retain our terminal repo rate forecast of 6.25% by April 2023,” it said.

The configurations that exist today – hardening US yields; ever strengthening US dollar; equity sell-offs; emerging currency depreciations and capital outflows; rising debt distress – are reminiscent of 1993-1994 after which followed a cascade of emerging market crises.

“At least, all the symptoms of a generalised financial deleveraging are in place,” said deputy governor Michael Patra.



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