The upcoming RBI June Monetary Policy review is coming at the backdrop of large domestic currency depreciation, large capital flows indicating adverse movement in Balance of Payments in near future and increased probability of deficient monsoon rainfall. This may result in fall in GDP and increase in inflationary pressure impacting the growth engine.
Forecast made by regulator in April 26 assumed energy prices (Brent) at USD 85/bbl. and USD INR exchange rate at 94 in FY27, but the actual numbers since April 26 have been much negative from an inflation perspective. A prolonged west Asian conflict may set a “new normal” on energy prices with average increase of USD 10 to 15 per barrel than previous regulatory estimate. This sets a strong case for generalised increase in price pressures ultimately percolating to demand side. This creates a strong skewness towards rate hikes in near future.
We do not expect any immediate rate hike in June MPC, but there is a significant likelihood of MPC increasing the inflation forecast for FY 27 from 4.6% to somewhere near 4.9% - 5% range and cumulative growth projection down from 6.9% to 6.7% - 6.8% range. MPC is likely to prepare the market for a rate hike during the subsequent MPC meet in August through some hawkish hints in its forward guidance. The present growth inflation dynamics has created a strong case for at least two 25 bp rate hikes between August and December 26 MPC meet.
