India: Another hawkish salvo from the RBI minutes – Nomura

The Reserve Bank of India (RBI) released the minutes of its 5 April policy meeting which suggests a risk of a change in stance or dissent by more than one member (for a hike) at the June policy meeting, explains the research team at Nomura.

Key Quotes

“Despite the RBI significantly lowering its inflation projection (4.7-5.1% in Q2-Q3 vs. 5.1- 5.6%; 4.4% in Q4-Q1 2019 vs. 4.5-4.6% previously), the minutes were distinctly hawkish. The minutes suggest a near unanimity that risks to inflation are tilted to the upside. The common worries on inflation cited include: (1) the inflationary impact of minimum support price (MSP) increases; (2) rising growth momentum leading to sticky core pressures; (3) fiscal slippage; (4) volatility of crude oil prices; and (5) state governments awarding increased House Rent Allowance (HRA). Most members seem to agree that the softness in inflation in Q1 was primarily due to transitory seasonal easing of food prices and the “noise” ought to be looked through. Many members cited rising inflation expectations and a pick-up in core inflation (ex-HRA) as a worrying sign.”

“Meanwhile, most members are confident that the ongoing growth revival will continue, led by investments. However, there is some divergence in views.”

“Overall, the minutes suggest most MPC members are becoming confident about a growth recovery and see upside risks to inflation, raising the question why there was no change in policy stance at the April policy meeting. We judge that the downward surprise in near-term inflation likely held back MPC members as the upside risks were yet to materialise. However, the minutes suggest a risk of a change in stance or dissent by more than one member (for a hike) at the June policy meeting.”

“In our baseline, we expect the RBI to stay on hold, but risks are clearly biased towards tightening given the continued rise in oil prices and impending MSP decision. A hike may be motivated also by a need to reinforce credibility in the early stages of the flexible inflation-targeting regime. At the same time, given corporate balance sheet constraints, slow progress on bad asset resolution and the largely cyclical ongoing investment recovery, we do not believe that the RBI is likely to embark on a series of rate hikes.”