CPI inflation to trend higher; chances of rate hike rising: Report

Inflation is expected to trend higher and though RBI may keep policy rates on hold in 2018-19, there are also increasing chances of a rate hike, says a UBS report.

According to the global financial services major, minutes from the February 7 meet of Monetary Policy Committee (MPC) seem "hawkish", and highlight upside risks to inflation.

The Reserve Bank kept the key policy rate unchanged at 6 per cent for the third consecutive time in the last policy meet in view of the firming inflation.

As per the minutes , there was broad consensus that risks to inflation are clearly tilted to the upside. Moreover, fiscal slippage and higher MSP are the key concerns, UBS said in the research note.

UBS expects headline CPI inflation to remain in the range of 5.1-5.6 per cent over the next few months and average 4.9 per cent year-on-year in 2018-19.

"In our base case, we expect the MPC to keep rates on hold in 2018-19," UBS said.

However, factors that may lead to a rate hike include higher MSP pushing up food inflation, firming up of global crude oil prices and populist spending in the run-up to 2019 Lok Sabha election.

If these risks materialise, "we do not rule out a pre-emptive 50 bps hike over the next 12 months to ensure macro stability risks are contained," UBS said.

Meanwhile, according to a Morgan Stanley report, the inflation trajectory will hold the key towards determining when the central bank will hike interest rates.

"In this context and also from our read of the MPC statement and the minutes, while the next move is likely to be a rate hike, it is unlikely to be taken up immediately," Morgan Stanley said in a research note.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel