Economic Analysis - RBI To Hike As Moderation In Food Prices Likely To Be Short-Lived - MAY 2018

BMI View: We expect the moderation in inflation due mainly to lower food prices to be temporary and we maintain our outlook for inflation to pick up over the coming months. As such, we continue to forecast the Reserve Bank of India to deliver 25bps worth of rate hikes, raising its repurchase rate to 6.25% from 6.00%, by the end of 2018.

Although consumer price inflation (CPI) moderated to 4.4% y-o-y in February from 5.1% y-o-y in January mainly due to a decline in food inflation to 3.4% y-o-y from 4.6% y-o-y, respectively, this is likely to be temporary. Over the coming months, we continue to expect inflation to head higher on the back of higher food and oil prices, as well as growing fiscal spending. As such, we maintain our forecast for the Reserve Bank of India (RBI) to raise its repurchase rate by 25bps by the end of 2018 to 6.25% from 6.00% to manage growing inflationary pressures. Our view for a rate hike is also being reflected in the fixed income markets, with the 1-year interest rate swap rising to 6.4% (as of March 13; see chart below).

Prices Likely To Remain High

Market Appears To Be Pricing In One Hike
India - 1 Year Interest Rate Swap & RBI Policy Rate, %
BMI, Bloomberg

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