RBI monetary policy: Analysts surprised by the repo rate hike say there’s more in the offing

Mumbai: The hike in policy rates by the Reserve Bank of India (RBI) on Wednesday came as a surprise for analysts, who cautioned to brace for more such moves in the future as the central bank has upped its inflation forecast. Icra Ratings’ managing director and chief executive Naresh Takkar said the rate hike will push up bank lending rates, impacting their margins, and may also test the strength of the investment recovery in FY19. “Based on the past narrative of RBI, we did not anticipate…with this hike, RBI has already signalled a reversal on policy rates, and we believe one more may be in store during FY19,” the rating agency said in a statement. It attributed the hike to both domestic considerations which are causing an increase in inflation, as well as international ones like the US Fed’s stance with respect to unwinding of its balance sheet and guidance on interest rates. [caption id=“attachment_4499583” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] Domestic factors which will hurt inflation will include house rent allowance revision by state governments, surge in minimum support prices and also impact of the crude price hikes, it said. The agency’s rival Care Ratings said that it had anticipated for a status quo in rates at the policy announcement and added that it expects “at least” another 0.25 percent hike in rates by December and possibly one more by March next year. The rise in inflationary expectations, risks posed by higher crude oil prices and a weaker rupee resulted in the “pre-emptive” rate hike by the RBI’s monetary policy committee (MPC), the six-member rate-setting panel, Takkar said. “The maintenance of the neutral stance suggests that future rate hikes would be data dependant,” he added. Crisil Ratings’ chief economist Dharmakirti Joshi echoed the same, saying the neutral stance implies RBI wants to “keep its options open” in the wake of domestic and global uncertainties. In the first such action in more than four years, the MPC resolved to hike the repo rate by 0.25 percent to 6.25 percent, citing risks to inflation, for which the RBI estimate was upped by up to 0.30 percent during the fiscal. Governor Urjit Patel later explained that the growth momentum is also picking up in the economy and the MPC decided to focus on its core objective of inflation targeting. He said the RBI will be cautious way forward and will look at data on both inflation and growth.