RBI likely to start rate hike cycle by Q4, says Morgan Stanley

The Reserve Bank of India (RBI) is expected to go for a hike in key policy rates by the fourth quarter of this year, as the country's economic recovery is likely to be be on a "surer footing" by then, says a Morgan Stanley report.

The global financial services major, expects the start of a shallow rate hike cycle by the fourth quarter of 2018.

"The key argument for the case for a rate hike by 4Q18 is two-fold, in that we don't expect a significant overshoot of inflation relative to the RBI's target and that the economic recovery will be on a surer footing by then," Morgan Stanley said in a research note.

The global brokerage, expects private capex to show signs of recovery by the end of this year.

"Against this backdrop of greater certainty and a more sustained recovery in growth, the central bank can then move to commence a shallow rate hike cycle," it said.

In the first bi-monthly monetary policy for 2018-19, the central bank left the repo rate unchanged at 6%. The MPC maintained status quo for the fourth consecutive time since August, last year.

Five members of the panel, including the RBI Governor, voted for a status quo.

According to a Deutsche Bank Research paper, given the current and near-term growth-inflation mix, the RBI is likely to remain on an extended pause provided there is normal monsoon and global oil prices remain below $70/barrel.

"We expect a cumulative 75 bps rate hike in this cycle, but see the hikes starting from early next year, rather than this year under our base case scenario," the Deutsche Bank Research report said.