MPC Rate Hikes Imminent Amid Crude Shock and Yield Surge
Crisil's Dipti Deshpande warns of imminent MPC rate hikes due to rising crude oil prices and monsoon deficits impacting inflation.
The Indian economy is bracing for a shift in monetary policy as rising crude oil prices and monsoon shortages create significant inflationary pressure. According to Dipti Deshpande, Principal Economist at Crisil, the Monetary Policy Committee (MPC) is likely to initiate a cycle of rate hikes to combat these escalating costs.
The Double Whammy: Crude Oil and Monsoon Deficits
A major driver behind the potential tightening is the dramatic surge in energy costs. Deshpande noted that while oil prices previously hovered around USD 85, the Indian basket is now approaching the USD 120 mark. This spike in input costs, combined with a 13 per cent rainfall deficit during the southwest monsoon, creates a volatile environment for inflation.
"Producers will start to pass on these retail prices because they would not want to crimp their profits even further," Deshpande warned, noting that this behavior is expected to drive up core inflation.
Projected Rate Hikes and Fiscal Outlook
Crisil’s analysis suggests that the upcoming October policy meeting will mark the first rate hike of the year. The firm anticipates a measured approach to manage inflation without stifling growth:
- October Policy: An expected initial hike of 25 basis points.
- Fiscal Year Total: A projected cumulative increase of 50 basis points by the end of the fiscal year.
- Yield Trends: While 10-year G-Sec yields remain firm above 7 per cent due to global tightening, some softness is expected by March as fiscal consolidation takes hold.
Private Capex to Remain Resilient
Despite the looming increase in borrowing costs, there is optimism regarding corporate investment. Deshpande highlighted that interest rates are not the primary driver for corporate borrowing and capital expenditure (capex).
Current manufacturing capacity utilisation stands at approximately 75%. Historically, reaching this level serves as a trigger for fresh capital deployment, suggesting that private capex will remain steady even as the cost of credit rises.
Structural Buffers vs. Geopolitical Risks
India currently possesses strong structural cushions to defend against external shocks, including:
- Robust corporate balance sheets.
- Low non-performing assets (NPAs) within the banking system.
- Solid underlying economic growth.
However, Deshpande issued a cautionary note regarding global stability. She warned that if geopolitical spillovers and external pressures persist for more than a year, these vital economic buffers could begin to deplete.
The Rupee and Foreign Investment
Addressing concerns over currency volatility, Deshpande ruled out rate hikes intended solely to defend the rupee. She observed an appreciation bias for the local unit, driven by the growth differentials that the Indian economy continues to offer to foreign investors.