India's central bank may hike rates this week

Mumbai

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.

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 per cent growth for the quarter ended March 31. But the key concern of the Reserve Bank of India, which has long kept the repo rate at 6 per cent, 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 per cent of nearly 60 respondents saw a rate hike on Wednesday, while nearly 70 per cent 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.

ANZ also changed its rate-hike view, seeing a 25 bps increase on June 6, to 6.25 per cent, and another such one in August. Mr 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 was 4.58 per cent in April, the sixth straight month when it topped the RBI's medium-term 4 per cent 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 US 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. "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 yield has risen by 30 basis points to 6.40 per cent since the April policy meeting while the spread between 10-year benchmark bond yield and repo rate widened as much as 195 basis points, its highest since March 2009.

The rupee has weakened by about 4.7 per cent against the dollar in 2018. Meanwhile, Indian lenders are raising interest rates even before any central bank action as the strongest loan demand in four years amid weak deposit growth pressures funding costs.

State Bank of India, ICICI Bank Ltd and Punjab National Bank are among the nation's biggest banks that increased their benchmark lending rates last week.

Higher borrowing costs risk slowing the recent recovery in demand for credit, which was led by retail and working capital loans, said Karthik Srinivasan, group head of financial sector ratings at ICRA Ltd, the local unit of Moody's Investors Service.

Moody's cut India's 2018 economic growth forecast last week, citing tighter financial conditions as a reason. REUTERS, BLOOMBERG