Rate hike talk unwarranted now, says SBI Research; flags driest June in 126 years as key risk

Talk of a rate hike by the Reserve Bank is “unwarranted” at this stage, State Bank of India’s research team said, arguing that the minutes of the June monetary policy meeting point to heightened uncertainty among rate-setters.

In a report analysing the minutes of the Monetary Policy Committee’s June 3-5 meeting, SBI Research said the language used by MPC members reflected the highest degree of uncertainty and caution since 2016, suggesting that policymakers are more likely to stay data-dependent than move quickly on rates.

“Inflation risk has risen, but uncertainty is too high for immediate action. Hold now, stay neutral, wait for clarity, and keep optionality open is the underlying message of the MPC minutes,” the report said.

It asserted that “to talk about rate hike is unwarranted at this juncture”.

“In uncertain times, a good central bank should be cautious about false precision, forceful against high-cost tail risks, systematic enough to preserve credibility, flexible enough to adapt, and transparent enough that uncertainty about the economy does not become uncertainty about the central bank itself,” the report added.

SBI Research said the monsoon poses the “most uncertainty” for policymakers, noting that June rainfall so far was 42% below normal, making it the fifth driest June in 126 years.

It said the rainfall deficit could keep pressure on food prices, although the possible emergence of a positive Indian Ocean Dipole later in the season may offer some relief to the monsoon.

The report, however, said easing crude oil prices and the rupee’s appreciation could cushion imported inflation.

It projected the average price of the Indian crude basket at about $85 per barrel and said that could lower the country’s oil import bill by $25 billion compared with its earlier estimate.

SBI Research said consumer price inflation may stay above 5% for the next three quarters, while pegging full-year FY27 inflation at 5.1%.

It said risks to inflation are now “evenly balanced”, compared with the upside bias seen earlier.

The report also flagged a rise in household inflation expectations.

Median inflation perception among households rose 60 basis points sequentially to 7.8%, while expectations for the next three months and one year increased to 9.3%.

According to the report, this gap between expected and actual inflation could make households more cautious on discretionary spending.