RBI likely to increase interest rate: Nomura

Mumbai: The minutes of the Reserve Bank of India’s (RBI) April 6 monetary policy meeting released on Thursday suggests that the central bank would likely hike interest rates to fight inflation according to Japanese financial services firm Nomura.  

The minutes showed that all members of the monetary policy committee expressed concern about the stickiness in core inflation with one member calling for a pre-emptive rate hike.

“Although we believe this will be necessary in 2018, we did not expect it to be mentioned just yet. Overall, we agree with the MPC members that food inflation will reverse as demonetisation effects fade and there are risks to the inflation outlook, which will become apparent as favourable base effects fade. We expect a cumulative 50 basis point repo rate hike in 2018,” Nomura said in a research note.

During its April 6 monetary policy meeting, the RBI kept its key policy rate unchanged citing upside risk to inflation while increasing the reverse repo rate by 25 basis point to drain out excess liquidity from the system.

According to the minutes, most members acknowledged that the recent decline in inflation was transitory, led by the impact of note ban on food price inflation, which is likely to reverse in coming months.

Dr Michael Debabrata Patra, member, MPC felt that a pre-emptive 25 basis points increase in the policy rate now will place the central bank in a much better position to lower inflation to a medium term target of 4 per cent. “It will also obviate the need for back-loaded policy action later when inflation is unacceptably high and entrenched,” he stated.

On the other hand, Dr Chetan Ghate said a rate hike would be necessary if the second round effects of the house rent allowance under the Seventh Pay Commission are large. “While we should see through any statistical effects from an increase in the HRA, the size of the second round effects may potentially be large depending on the extent and manner in which the HRA implementation takes place, in which case, there may be a need for a monetary policy response. Our focus on meeting the medium-term inflation target should remain laser sharp in light of such risks,” Dr Ghate said.