Interest rates could rise soon as RBI panel signals shift to hawkish stance
Photo Credit: Shah Junaid/VCCircle

India's central bank could take a more hawkish tone starting as early as June despite easing inflation, minutes of the monetary policy committee's (MPC) meeting that took place this month showed.

The Reserve Bank of India's MPC members flagged several concerns including an increase in minimum support prices for farmers and high and volatile crude oil prices, the minutes released on Thursday showed.

"Reinforcement of inflation-targeting credibility that such a shift would signal is crucial in my view for prudent macroeconomic management, on both the domestic and external sector fronts," Acharya said.

The Reserve Bank of India this month kept its policy repo rate unchanged at 6 percent for the fourth straight meeting and retained its "neutral" stance.

While five MPC members had voted in favour of the decision, one - Michael Patra - recommended a quarter percentage point hike in the repo rate.

Echoing Acharya, Patra said that despite ebbing inflation in the past few months, an easier or neutral monetary policy stance would delay achieving the inflation target.

"Underlying macroeconomic developments impart some urgency to commencing the withdrawal of accommodation," Patra said.

The central bank's medium-term inflation target has been set at 4 percent.

"The minutes of the MPC's meeting have a distinctly hawkish tinge as compared to our reading of the statement itself," said Aditi Nayar, the principal economist of rating agency ICRA.

"While incoming data and policy decisions related to factors such as MSPs, excise on fuels and expenditure announcements remain critical, today's minutes suggest that a back-ended rate hike in 2018 remains a possibility, if headline inflation exceeds the trajectory set out by the MPC.

"As a result, bond yields are likely to harden in the immediate term."

Data released after the monetary policy meeting showed retail inflation rate eased to 4.28 percent in March - a number that has been moderating since it hit a 17-month high of 5.2 percent in December.

During the policy meeting, the central bank lowered its April-September inflation projection to 4.7-5.1 percent, from a previous range of 5.1-5.6 percent that it released in February.

For the second half of this fiscal year, the MPC said it saw inflation at 4.4 percent, but that was without taking into account any increase from higher housing allowances to government employees.

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