By Swati Bhat
MUMBAI (Reuters) – India’s monetary policy committee (MPC) is expected to maintain key rates when it meets on Thursday, but will adopt a far more hawkish tone as the recent rise in food prices risks becoming entrenched, economists and market participants said.
A July 13-31 Reuters poll of 75 economists showed the central bank was expected to keep its repo rate unchanged at 6.50% at its Aug. 10 policy meeting.
Food price spikes in India, typical at the onset of the monsoon, drove up headline inflation in June, corroborating the MPC’s view that the fight against inflation is far from over, the Reserve Bank of India (RBI) said in its bulletin last month.
The rise in food prices, however, has been sharper than expected this year and is seen lasting longer.
“It’s likely that the hawkish rhetoric will be dialled up further in the MPC meeting,” Shilan Shah, deputy chief emerging markets economist at Capital Economics said.
DBS Bank expects the evolving inflationary trend to pose a 80-100 basis points (bps) upside risk to the MPC’s current inflation forecast of 5.2% for the September quarter.
June CPI rose 4.81%, snapping a four-month easing trend, with economists expecting the July print, due on Aug. 12, to top 6% levels, moving out of the RBI’s 2%-6% inflation comfort band.
The MPC at its June policy meeting also reiterated its intent of nudging inflation towards its medium-term target of 4% and not just holding it below 6%.
DBS said not only are rate cut expectations getting priced out, but the OIS curve appears to be pricing for around a 40-50% likelihood of a 25 bps hike over the next two RBI meetings.
Economists at ANZ also agreed with that view.
“There is therefore greater reason for the RBI to sound more hawkish at its upcoming meeting, even if it will likely keep the repo rate unchanged,” they said.
“It will also possibly emphasise a larger need to be watchful of the second-round effects of high food prices and inflation expectations.”
A majority of the economists polled said rates will stay at 6.5% through the first quarter of 2024, followed by 50 basis points worth of cuts by the end of June, around the same time when markets expect the U.S. Fed to start cutting its rates.
“The bond market will take cues from the RBI’s assessment of the current spike in food prices and its impact on the overall inflation outlook and monetary policy,” said Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC.
(Reporting by Swati Bhat; Editing by Sharon Singleton)
