June 4, 2018 / 6:43 AM / 2 months ago

For India's central bank, it's a choice between a rate hike now and August

MUMBAI (Reuters) - India’s central bank is getting poised to raise interest rates for the first time since January 2014, analysts say - the question is whether this will happen on Wednesday or in August.

FILE PHOTO: An India Rupee note is seen in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration/File Photo

The anticipated increase could put a dent in growth, which has recovered after blows from the November 2016 demonetisation and the bumpy July 2017 launch of a national goods and services tax. India reported stellar 7.7 annual percent growth for the quarter ended March 31.

But the key concern of the Reserve Bank of India, which has long kept the repo rate INREPO=ECI at 6 percent, is the inflation rate, which is widely expected to climb further.

A sharp increase in global oil prices has hit the Indian economy hard and the rupee, among the best performing Asian currencies last year, is one of the worst in 2018.

A Reuters poll before the January-March growth data showed that 40 percent of nearly 60 respondents saw a rate hike on Wednesday, while nearly 70 percent of 44 projected that in August - a sharp contrast to an April survey seeing an increase only in 2019’s second half.

But the robust growth data caused some to see a rate increase sooner rather than later for the repo rate, at its lowest since November 2010.

“While we had pencilled in the first hike for August, we now think there is a good chance the monetary policy committee will pull the trigger in June,” said A Prasanna, chief economist at ICICI Securities Primary Dealership in Mumbai.

HIGHER INFLATION ANTICIPATED

ANZ also changed its rate-hike view, seeing a 25 bps increase on June 6, to 6.25 percent, and another such one in August.

Prasanna expects the RBI to revise its consumer inflation projection upwards by 0.3 to 0.4 percentage points for March 2019 as the “risks to inflation are overwhelmingly ranged on the upside.”

India’s annual consumer inflation INCPIY=ECI was 4.58 percent in April, the sixth straight month when it topped the RBI’s medium-term 4 percent target.

In May, the Philippine and Indonesian central banks - lifted their benchmark rates for the first time since 2014. In March, China raised a key short-term rate following a Federal Reserve’s rate hike.

Wednesday’s RBI meeting comes one week before a Fed policy session that’s expected to increase U.S. rates again.

If India’s monetary policy committee does not raise rates this week, it would instead shift its stance to “tight” from “neutral”, many analysts said.

To view a graphic on India Repo Rate vs 10-Year Govt Bond Yield, click: tmsnrt.rs/2LcpWo8

“Markets are clearly pricing in 50 basis points rate hike in the next six months primarily due to concerns over oil prices rising further and rupee weakening more,” said Anindya Dasgupta, managing director and head of trading at Barclays in Mumbai.

If the repo rate is not hiked until August “it will lower the credibility of the central bank given that many other Asian central banks have already acted,” he said.

The three-month sovereign treasury bill <IN/3M> yield has risen by 30 basis points to 6.40 percent since the April policy meeting while the spread between 10-year benchmark bond yield IN10YT=RR and repo rate widened as much as 195 basis points, its highest since March 2009.

The rupee INR=D2 has weakened by about 4.7 percent against the dollar in 2018.

Reporting by Suvashree Dey Choudhury Editing by Richard Borsuk

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