MUMBAI: Global financial service firm Morgan Stanley believes that the upside risk to inflation in the domestic economy is making a case for an earlier than expected interest rate hike by RBI. It has earlier forecasted the possibility of a rate hike in Q4 of 2018.
“Our assessment remains that the starting point of core inflation and current account deficit is providing some buffer, but we do think that moderate risks are emerging on account of the wider-than-targeted fiscal deficits. To assess the risks to macro stability, we are watching oil prices, the impact of potential minimum support price hikes for the kharif crop, trends in government expenditure growth and rural wage growth. Finally, our base case assessment is that the RBI will hike rates in Q4 2018. However, considering that we see upside risks to our inflation forecasts, the risks are also tilting towards an earlier-than-expected rate hike,” Morgan Stanley said.
With increasing risks of rising inflation owing to multiple factors, analysts at Jefferies, a global investment bank said the possibility of rate hike in coming quarters seems more likely. They say the rate spread between policy rate and government bond yield has risen to 150 basis point. This is significantly higher than the five-year average of 60 basis points, making a strong case for policy rate hike.
“While the policy hawkishness was lesser than the implied treasury move over the last few weeks, there’s no denying that underlying rates will only harden,” Jefferies’ analysts added.