RBI-MPC to dial up hawkishness even as it holds policy steady

economictimes.indiatimes.com:

monetary policy committee (MPC) is expected to maintain key rates when it meets on Thursday, but will adopt a far more hawkish tone as the recent rise in food prices risks becoming entrenched, economists and market participants said. A July 13-31 Reuters poll of 75 economists showed the central bank was expected to keep its repo rate unchanged at 6.50% at its Aug. 10 policy meeting.

Food price spikes in India, typical at the onset of the monsoon, drove up headline inflation in June, corroborating the MPC's view that the fight against inflation is far from over, the Reserve Bank of India (RBI) said in its bulletin last month. The rise in food prices, however, has been sharper than expected this year and is seen lasting longer. «It's likely that the hawkish rhetoric will be dialled up further in the MPC meeting,» Shilan Shah, deputy chief emerging markets economist at Capital Economics said.DBS Bank expects the evolving inflationary trend to pose a 80-100 basis points (bps) upside risk to the MPC's current inflation forecast of 5.2% for the September quarter.

June CPI rose 4.81%, snapping a four-month easing trend, with economists expecting the July print, due on Aug. 12, to top 6% levels, moving out of the RBI's 2%-6% inflation comfort band. The MPC at its June policy meeting also reiterated its intent of nudging inflation towards its medium-term target of 4% and not just holding it below 6%.

DBS said not only are rate cut expectations getting priced out, but the OIS curve appears to be pricing for around a 40-50% likelihood of a 25 bps hike over the next two RBI meetings. Economists at ANZ also agreed with that view. «There is therefore greater reason for the RBI to sound more hawkish at its upcoming meeting, even if it