Tough Call For The RBI; Will It Hike Interest Rates Again Next Week?

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    Probably, this will be one of the toughest calls on an interest rate decision for the Reserve Bank of India in recent times, when it decides on a repo rate decision on Aug 1, 2018.

    The country's central bank had already hiked repo rates in June, in its last meeting, but, inflation is once again rearing its head, the rupee is falling and crude prices are moving higher.

    "It's a close call and a tough balancing act but we expect the RBI to tilt in favour of a 'hold' when it meets next week for the monetary policy review, " HDFC Bank has said in its latest report.

    The decision is expected on Aug 1, after a 3-day meeting of the 6-member Monetary Policy Committee which decides on interest rates. 

    "The inflationary risks are still there but the rise in food prices (in June and July) has been lower than the historical trend and this sort of subpar food inflation could be underlined as an offsetting factor against the MSP risk and elevated core inflation," the report has noted.

    Stabilization in the Indian rupee in recent weeks and moderation in oil prices could also be pointed out by the RBI as somewhat comforting.

    Core inflation a worry

    However, core CPI inflation (CPI excluding food and fuel) rise remains worrisome and something the Monetary Policy Committee (MPC) would have to consider. It has moved higher to touch 6.4 per cent, versus 6.2 per cent in May.

    The hike in Minimum Support Prices for farmers, also has the potential to lead to a spike in inflation.

    Core inflation in was flat in June, but, this figure would continue to worry the RBI going forward.

    Since the RBI targets forward looking inflation, it may have to act in the August policy, to ensure that it is on course.

    Tough Call For The RBI; Will It Hike Interest Rates Again Next Week?

    The other worry is that another round of Fed hikes could also mean some debt outflows and a further pressure on the rupee. "On the exchange rate front, depreciation of the Rupee and the risk of imported inflation is an important factor to consider for the Monetary Policy Committee. So far, the rupee has depreciated and has been an underperformer in Asia," HDFC Bank has said in its report.

    Conclusion

    Worries over rising crude, falling rupee and rise in core inflation remains a worry. This may lead to the RBI just tilting in favour of a hike in interest rates, though one may not be surprised, if the policy remains a status quo one.

    It is a tough decision for the 6-member MPC to decide, but, the RBI this time maybe more hawkish than before.

    Read more about: rbi interest rates repo rates
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