Business Today

Experts don't see rate hike for now

Leading economists feel RBI could postpone raising key rates in its review on Thursday, but continued funds crunch could force banks to hike lending rates in the coming months.

B.S. Srinivasalu Reddy   Mumbai     Last Updated: December 13, 2010  | 16:17 IST

Many economists think that the Reserve Bank of India (RBI) may stop short of hiking policy rates in its forthcoming review on Thursday. However, rising deposit rates and continued funds crunch are set to force banks to opt for raising lending rates in the coming months, if not weeks.

Deceleration in inflation and growth that is just picking up pace warrant a pause in policy rate - repo (at which RBI lends to banks) and reverse (at which RBI pays banks on overnight deposits by banks) repo - hikes on November 16, economists feel.

"Policy rate hike is a bit dicey at this juncture. Deceleration in inflation is visible and growth is just getting robust. The situation does not call for a hike in policy rates. But we expect a rate hike next month," said Professor N. R. Bhanumurthy of the National Institute of Public Finance and Policy.

  • Visible positive impact of the earlier policy rate hikes may be the reason for halting rate hike in the forthcoming policy review
  • An attempt by the RBI to ease the scarcity of funds in the banking system is unlikely at the moment as this would lead to higher inflation
  • RBI expects the govt to soon spend the Rs 91,000 crore lying in its coffers, so that the scarcity of funds in the banking system would ease
  • Public offerings are getting huge response from retail investors, locking up funds outside the banking system for a while
Inflation measured by the wholesale price index (WPI) is at 8.58 per cent for October, the lowest level seen in 10 months, but is still above the RBI tolerance level of about five per cent.

Annual food price inflation rose 8.69 per cent for the week ended November 27, compared to 8.6 per cent earlier, while fuel inflation remained at 9.99 per cent. D.K. Joshi, principal economist of Crisil, also feels that the possibility of a rate hike in the forthcoming policy review is remote, given the visibility of positive impact of the earlier policy rate hikes.

RBI has hiked the repo and reverse repo rates by 1.5 per cent and 2 per cent, respectively, since March 2010, particularly to tame inflation, which spiralled close to 12 per cent.

Inflation figure for November is set to be released on Tuesday. Many experts are hoping that a lower figure would support the pausing of a rate hike cycle for now.

Madan Sabnavis, chief economist of Credit Analysis and Research (CARE) said: "Though inflation is trending down, there is a likelihood of a small 0.25 per cent hike in policy rates."

"Earlier, it was thought the hike will come up in January. But it could happen now given the robust growth in the economy," Sabnavis added.

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