NEW DELHI – The Reserve Bank of India may hike policy rates once more to bring down inflation in line with its target despite the dovish tone in the second bi-monthly monetary policy review today, HSBC said in a report.
“We see a few risks lurking in the background. These may lead to price pressures remaining sticky into year-end and could yet force the hand of the RBI to raise interest rates one more time,” HSBC said in a report.
Accelerating demand amid still-constrained supply potential may prevent inflation from falling as quickly as hoped, it said.
In his first monetary policy statement after the formation of a new government under Prime Minister Narendra Modi, RBI Governor Raghuram Rajan today left the repo rate unchanged, but cut banks’ Statutory Liquidity Ratio by 50 basis points.
The RBI also reiterated its commitment to ensuring that the economy continued on this disinflationary course, with an aim to contain consumer price index-linked inflation to 8% by January and to 6% by January 2016.
“The BJP’s thumping victory risks unleashing pent-up demand, both consumption and investment, in the next few months that could fan price pressures. To avoid this, a stringent budget is needed that dampens near-term spending impulses, while laying the ground for a future recovery,” it said.
Inflation would largely be driven by the weather this summer. “Food supply policies may not prove effective in the near-term to rein in prices if the summer stays dry,” it said.
The India Meteorological Department in April had forecast southwest monsoon rains at 95% of the long period average, with a 60% chance of an El Nino developing, a phenomenon that affects monsoon rains over India.
