Monetary Policy Overview: Will the RBI Raise Interest Rates Tomorrow?

The Monetary Policy Committee of the Reserve Bank of India (RBI) will release its policy statement on Wednesday, August 1, 2018. At this time, repo rates and reverse repurchase agreements are at 6.25 % and 6% respectively.

Politics comes amidst rising inflation and the fall of the rupee. The widening of the current account deficit during an election year is also a key element that can be monitored by policymakers.

Recently, investment guru Mark Mobius also commented that the central bank would make a big mistake if it were to raise rates in August. Most economists in a Bloomberg News poll expect the Reserve Bank of India to increase the ratio by 25 basis points on August 1, a second increase in eight weeks. READ MORE HERE

So, will the RBI raise interest rates in its next monetary policy review tomorrow? BofA Merrill Lynch

We think the RBI MPC will be waiting and watching Wednesday – in a hawkish tone – after its June hike. If the monsoons are normal, it should be long. If, however, East does not get enough rains, the RBI's PPM will likely increase by 25 basis points in October, although slackening of the rice buffer stock will help much more than monetary tightening.

On our side, we would be monitoring RBI's Open Market Operations Plans (OMOs) ($ 50 billion if the REIT flows do not return) with sustainable liquidity contracting of about $ 10 billion. dollars to defend Rs 69 / USD. We estimate that the RBI will have to sell $ 20 billion ($ 14 billion so far) if the REIT flows do not turn out. It also remains to be seen if the RBI assures the FX market that NRI bonds (raising $ 30-35 billion) are a political option. The Department of Finance has already done

Kotak Securities

We have highlighted a repo rate of 25 bps in the August policy. The main reasons for the rise are (1) overall inflation remains well above 4% in the medium term, (2) underlying inflation remains sticky and high and the risks of rising prices inputs in the coming quarters (3) announced increases in MSP and percolation risk for food inflation (which also implies that the RBI is expected to slightly revise its overall inflation for 2HFY19), (4) concerns on the INR remain, and (5) growth remains on the output gap closes quickly and can lead to inflationary pressures in the medium term. Even though we are calling for a rate hike, the RBI could stop mainly to wait for PSM hikes to start affecting food prices and inflation expectations have changed in the last quarter.

With RBI rate decisions now guided by the inflation targeting goal, the recent upswing in inflationary momentum will see the central bank raise the rate repo of 25 basis points added from August 1st to 6th.

The RBI will exceed the last level observed in October 2016, when it took a "neutral" position, implying that the next rate hike will be the first step towards a "tightening" position in the current cycle . We now believe that with the sharp rise in the CPI and WPI inflation, RBI could make a cumulative tightening of more than 50 basis points during the remainder of fiscal year 19.

Retail inflation (CPI) continued to strengthen in June 2018% yoy, with a persistent rise in core inflation at 6.4%. WPI inflation is at 5.8% yoy in 5 years, far exceeding the CPI inflation due to a stronger rise in inflation of the raw materials.