Experts sure RBI would raise rates- Business News

Experts sure RBI would raise rates

They stick to a 0.25 per cent hike in the monetary policy review on January 25, citing spiraling headline inflation, which reversed its moderating trend in December 2010.

  • Mumbai,  January 21, 2011  
  • |  
  • UPDATED   11:18 IST

The rise in food prices has eased for the second week in a row through January 8, 2011, but for the Reserve Bank of India (RBI) that is not something to cheer about and pause the cycle of policy rate hikes next Tuesday, said experts. Thus, borrowers have to brace for another hike in bank lending rates, which have already hardened over the last couple of months.

According to the latest statistics released on Thursday, food prices rose 15.52 per cent YoY (compared to the figure during the same time last year) for the week ended January 8, compared to 16.91 per cent rise in the previous week. But the decline in food prices was slower than expected, though it has brought down primary articles inflation down to 17.03 per cent, from 17.58 per cent for the previous week.

However, experts stick to a 0.25 per cent hike in the forthcoming monetary policy review scheduled for January 25, citing spiraling headline inflation measured by wholesale price index (WPI), which reversed its moderating trend in December 2010.

During that month, it had risen by 8.43 per cent, from a rise of 7.48 per cent in November. This was again prompted by higher food prices.

Indranil Pan, chief economist of Kotak Mahindra Bank, said, "About 0.25 per cent hike in policy rates is expected in this month's policy. RBI is expected to remain cautious due to significant moderation in Index of Industrial Production (IIP) figures for November 2010 and sagging growth globally."

Repo (rate at which RBI lends overnight to banks) and reverse repo (at which RBI pays banks on their overnight deposits) rates are the policy rates that are used to signal the trends in bank deposit and lending rates.

But, will growth concerns weigh more on the RBI's mind than inflation? "No, inflation remains the main concern for the monetary authority. Though industrial growth lagged only for a month, it cannot be taken as a trend in itself," said N. R. Bhanumurthy, professor at the Delhi-based think-tank, National Institute of Public Finance and Policy (NIPFP).

"RBI is also expected to do something to mitigate the liquidity problems, besides moderating the excess supply of money in the hands of the public, which led to speculation in food items," Bhanumurthy added.

Moderate rate hikes may not rein in the current inflation spiral, which is more of a supplyside concern than a demand-led one. The steps taken in the past by the RBI like hiking the repo and reverse repo rates by 1.75 per cent and 2.25 per cent to 6.25 per cent and 5.25 per cent respectively, have failed to result in the intended results - to tame inflation - so far.

"However, continued hike in policy rates could hamper demand in the economy and consequently affect the investment growth, which is still fragile in nature," said Arun Singh, senior economist with global database major Dun and Bradstreet (D& B).

Money markets, where government securities and other debt are traded, have already discounted that the RBI would raise the policy rates - repo and reverse repo rates by 0.25 per cent in the quarterly review of the policy on Tuesday.

Looking ahead into 2011, Indranil Pan said RBI would hike the repo rate up to 7.25 per cent - that is 0.75 per cent more after the January hike.

Courtesy: Mail Today