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1 June 2018
 |
| RBI
(The Total Investment & Insurance Solutions) |
The
six-member Monetary Policy Committee (MPC) is likely to leave the repo rate
unchanged at 6 per cent in a close decision in the June 2018 policy review,
amid uncertainty on the impact of some key inflationary risks, according to
credit rating agency ICRA. Nevertheless, the tone of the policy document is
likely to signal a withdrawal of accommodation and a rate hike could be
imminent, it added. The Total
Investment & Insurance Solutions
Naresh
Takkar, Managing Director and Group CEO, ICRA, said: “Although the headline and
the core CPI (consumer price index) inflation for April 2018 revealed negative
surprises, an immediate rate hike may be premature, given the lack of clarity
on factors such as the 2018 monsoons, the minimum support price (MSPs) and
fiscal risks. The Total Investment
& Insurance Solutions
“However,
the expected rebound in the average CPI inflation for FY2019, in conjunction
with the higher-than-anticipated GDP expansion in Q4 (January-March) FY2018,
suggests that a back-ended rate hike cannot be ruled out, which is likely to be
reflected in the tone of the policy document.”
Takkar
observed that if the availability of capital constrains credit growth of the
public sector banks, particularly those under the prompt corrective action
(PCA) framework, it may hamper the ability of lower rated firms as well as SMEs
to access adequate financing. The Total
Investment & Insurance Solutions
Higher
rated corporates are likely to tap the domestic bond market (despite elevated
domestic bond yields) and external commercial borrowings (despite higher global
rates) for their financing needs, he said.
Lending
rates to go up
ICRA,
in a statement said, while bond yields have already hardened, the back-ended
monetary tightening in 2018 may push up bank lending rates. Accordingly,
interest costs are likely to rise in the current fiscal, which would weigh upon
margins as well as the strength of the investment recovery in FY2019.
The
year-on-year (YoY) CPI inflation prints, released since the last policy review,
have provided a mixed trend, with a dip from 4.4 per cent in February 2018 to
4.3 per cent in March 2018, followed by a sharper-than-expected rise to 4.6 per
cent in April 2018. The Total
Investment & Insurance Solutions
ICRA
underscored that some of the risks highlighted by the MPC in their April 2018
policy review, have come to the fore, such as the substantial rise in global
crude oil prices, accompanied by a depreciation of the Indian rupee. Moreover,
the core CPI inflation has recorded a sharp uptick to a 44-month high of 5.9
per cent in April 2018, it added. The
Total Investment & Insurance Solutions
“Greater
clarity is awaited on the level at which MSPs (minimum support price) are fixed
for the upcoming kharif season, as well as the eventual volume and dispersion
of the monsoons in 2018.
However,
the momentum of the seasonal uptick in food prices continues to be dampened by
the weakness in items such as sugar, pulses and onions,” said the agency’s
statement. The decline in the CPI inflation from 4.5 per cent in FY2017 to 3.6
per cent in FY2018, was accompanied by one rate cut in 2017.
While
the monthly CPI inflation prints are likely to remain volatile going forward,
ICRA expects the average CPI inflation to rebound to 4.6 per cent in FY2019,
which suggests an imminent rate hike in H2 (July-December) CY2018.
However,
there is a low likelihood of immediate monetary tightening in the June 2018
policy review, as the prevailing lack of clarity on factors such as the 2018
monsoons, the MSPs and fiscal risks, are likely to evince varied responses from
the MPC members. The Total Investment
& Insurance Solutions
“While
the decision to leave the repo rate unchanged at 6 per cent in June 2018 is
likely to be non-unanimous, the tone of the policy document is likely to signal
that a withdrawal of accommodation and a rate hike could be imminent,” said
ICRA.The Total Investment &
Insurance Solutions
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