RBI to raise policy rates by 25 bps in first quarter of 2019; inflation, rupee depreciation to blame: Goldman Sachs report

New Delhi: The Reserve Bank of India (RBI) is expected to increase policy rates by 25 basis points in the first quarter of the next year, primarily led by inflationary pressures and depreciation of the rupee, says a Goldman Sachs report. According to the global financial services major, there is likely to be continued upward pressure on core inflation and revised upwards its FY19 inflation forecast to 5.2 percent (as against 5.3 percent earlier). “We continue to believe that the RBI is underestimating the rise in headline inflation, especially given their updated assumptions on oil, INR, and MSP,” Goldman Sachs said in a research note. [caption id=“attachment_5129811” align=“alignleft” width=“380”] Representational image. Reuters[/caption] Besides the prediction of a 25 bps rate hike in the first quarter, Goldman Sachs said RBI is expected to hike policy rates by 25 bps each in the second, third and fourth quarter of 2019. The Reserve Bank on Friday maintained status quo on the benchmark interest rate but warned that volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to the growth and inflation. In its fourth bi-monthly policy this fiscal, RBI changed the policy stance to ‘calibrated tightening’ from ’neutral’, while affirming its commitment to achieve the medium-term objectives to contain price rise. A majority of the analysts and bankers were expecting the six-member Monetary Policy Committee (MPC) to raise interest rate by at least a 0.25 percent, while the developments over the last few days, especially the weakness in the rupee, had led to speculations that it could be even high as high as 0.50 percent. Soon after the announcement, the rupee breached the 74-mark against a dollar for the first time, making imports costlier and posing a threat to current account deficit (CAD). The rupee is currently hovering around 73.90 against the dollar. The next policy meeting is scheduled during 3-5, December.