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The Reserve Bank of India (RBI) is expected to change its direction to a hawkish stance at its monetary policy meeting in June (small probability of a pre-emptive hike) and pave the way for a 25 basis points increase in August, according to the latest report from DBS Group Research.
April CPI inflation rose 4.6 percent y/y, vs March’s 4.3 percent print. Non-food components accounted for the entire increase, just as food pressures stabilized. Core/core-core inflation outpaced headline inflation to a three-and-half-year high.
Adverse base effects and seasonal factors are likely to drive headline inflation past 5 percent by June-July 2018, before pulling back into the 4-5 percent range.
"With another move likely in the fourth quarter of this year, we see room for cumulative 50bp hikes in FY19. Slow progress on the banks’ bad asset resolution and a gradual turnaround in growth suggest that an aggressive hiking cycle is unlikely", the report added.
Meanwhile, the central bank is unlikely to be comfortable with the firm core inflation amidst the higher volatility in the bond and exchange rate markets.
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