AT THE CUSP OF A RATE HIKE CYCLE

about 6 years ago
No image

 

By Ruma Dubey

You read the minutes of the February Monetary Policy Committee (MPC) and for once, you heave a sigh of relief – at least all the members of the RBI were thinking the same, except one who was vocal enough to dissent and proposed a rate hike.

The other five members all knew that inflation was becoming a huge threat but more than economics, politics made more sense; one member, Deputy Governor, Viral Acharya felt that if a rate hike came in now, it could cripple the economy which was just about recovering. Thus 5 out of the 6 decided to remain cautious while one, Michael Patra said, “In view of the prolonged period of status quo, a series of rate increases may be warranted to remove excessive accommodation. The time to begin is upon us.”

Thus the hard truth is that we should give up all hopes of a rate cut as we are actually getting ripe for a rate hike.

RBI watches inflation and not growth. The threats to inflation are very real now; we already had to worry about the rising crude oil price and then the “election budget” made it a certainty – inflation will remain high. The imminent hike coming in Minimum Support Price (MSP), increase in customs duty and fiscal slippages – all add up, even on basic common sense to a hike in inflation.

In the RBI minutes, Patra has rightly pointed out the easing of inflation between July and March was mainly statistical due to the waning effect of the HRA. Patra expects the higher end of inflation to breach the 6% threshold and this would dent the credibility of RBI and it had forecast a 5.1% CPI for March and 5.1% to 5.6% in H1FY19.

Patra, in the Minutes has said, “If the statistical reversal of the HRA effect is looked through, the real policy rate is below 1% and could fall further absent policy action. This is completely misaligned with underlying fundamentals and the economy’s prospects at a time when activity is picking up. Fixed income markets are telling us that we have fallen behind the curve.”

So as we get ready for the scorching summer months ahead, let us also get ready for some tough times ahead. We all are already much more than what we did a couple of years ago for most things, statistically, that will now get reflected and the pinch on our pockets all the more.

RBI says that it has not yet finished counting all the money it got on account of demonetization – that was when rate cycles were going down; they are still counting and the cycle has already reversed. Isn’t that something to think about….

Popular Comments

No comment posted for this article.