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Hat-trick on rate hike almost certain, but will the RBI change its stance?

Given the rupee's slide and soaring crude prices, it's almost certain that the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) will raise the repo rate for the third time in a row. 

In the last policy meet, the RBI hiked repo rate by 25 basis points to 6.50 per cent, for the second time in a row. Reverse repo -- the rate at which the Reserve Bank borrows money from commercial banks within the country -- was adjusted to 6.25 per cent. The MPC had kept its policy stance neutral.

Most analysts expect the central bank to hike rates by 25 basis points (bps) when it announces monetary policy today. However, the key thing to watch out for this time around is whether the RBI will change its policy stance.

That apart, RBI is also expected to employ various liquidity management tools to ease the tight liquidity and the volatility in the money markets caused by the sharp depreciation in the rupee and the recent defaults in Commercial Papers (CP) by a large conglomerate.

Here's what experts believe the RBI will do.

Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mahindra Asset Management Company

Markets seem to already have discounted a rate hike at the current prices and the tone of the policy could be a key determinant for yield movements.

Aditi Nayar, Principal Economist at ICRA

The inflation risks posed by revised minimum support prices, higher crude oil prices and a weaker rupee would push up the headline consumer price inflation (CPI) to 4.6 - 5 per cent in Q4 FY2019. Hence, a third consecutive rate hike is almost certain.

We anticipate that the rate hike will be accompanied by a change in the stance of monetary policy from neutral to withdrawal of accommodation. This would indicate the possibility of another rate hike in December 2018, unless the inflation trajectory softens by then.

Ajay Bodke, CEO & Chief Portfolio Manager (Portfolio Management Services) at Prabhudas Lilladher

The central bank is unlikely to shift its stance from neutral. Given the RBI's recent decision of injecting Rs 36 billion liquidity into the system through purchase of government bonds in October, the RBI would essentially want to signal that liquidity is not too tight.

Sundar Shanmukhani, Fund Manager of Choice PMS 

In order to calm the jittery market, the RBI needs to adopt a dovish approach. They can't adopt a hawkish tone as it will worsen the market. Hence, it is likely to maintain the neutral stance. Data-wise, the rupee has depreciated almost 7 per cent since last policy while crude oil prices are up by over 17 per cent.

Karan Mehrishi, Lead Economist at Acuité Ratings and Research

The tightness in the liquidity was clearly visible with the spurt in the weighted average call money rate (WACR) and its differential with the repo rate narrowing to only 4 bps over the last fortnight. RBI has already permitted banks to avail additional liquidity, if necessary from a larger pool of high quality liquid assets (HQLA) which is kept as SLR. Hence, further liquidity management measures can be expected in the run up to the monetary policy statement in early October

Gaurang Somaiya, currency analyst at Motilal Oswal Securities 

The central bank opt for 0.25 per cent hike, but what the governor really needs to answer ‘is rate hike really needed’? At present, RBI’s stance is to keep enough liquidity so that the short term rates, call money rates, remains around the policy repo rate. In the recent announcement, the RBI decided to allow lenders to dip further into statutory liquidity reserves (SLR), to help them meet their liquidity coverage ratio (LCR) requirement.

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