Inflation risk seen triggering 25 bps RBI rate hike on 1 August

Central bank likely to maintain neutral stance,given the volatility in oil and food prices.


The Reserve Bank of India (RBI’s) monetary policy committee may raise policy by 25 bps on wednesday,the rate at which it lends to commercial banks , to 6.5%.

Since the last RBI rate hike in June, food and retail inflation, measured by consumer price index (CPI), have surprised to the downside, while core inflation has accelerated. The average inflation for 2018-19 now stands at 4.8-4.9% in the first half and 4.7% in the second half.

Why so?

RBI has been highlighting several long-standing risks to inflation. The key ones include higher oil prices, global financial market volatility, and an increase in minimum support prices (MSPs) for agricultural crops.National elections due in 2019 make it hard for government to ignore the Inflation control measures. In June ,the Central bank hiked its inflation forecast to 4.8%-4.9%.If there is any slim chance that retail inflation could breach this range,RBI would be better of hiking now.

Impact??

If repo rate increases the interest rate of the loan will also increase. Thus increasing the EMI. When interest rates rise, that’s typically good news for the profitability of the banking sector, but not for other business sector, that’s because the cost of capital required to expand goes higher. That could be terrible news for a market that is currently in an earnings recession.

ICICI bank (CMP: Rs.304, Market cap: Rs. 1,95,992 cr, PB:1.71x)

HDFC Bank(CMP: Rs.2173, Market cap: Rs.5,74,379 cr,PB: 4.21x)

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