RBI monetary policy review on May 3, another rate hike likely

RBI meet on May 3, rate hike likely

Though some of the money market participants are toying with the idea of a 0.5 per cent hike in policy rates, economists are expecting 0.25 per cent hike in policy rates.

  • Mumbai,  April 29, 2011  
  • |  
  • UPDATED   17:25 IST

Food and the general rise in prices are showing no signs of moderating and are expected to form the basis for one more policy rate hike by the Reserve Bank of India (RBI) next week.

Though some of the money market participants are toying with the idea of a 0.5 per cent hike in policy rates, economists are expecting 0.25 per cent hike in policy rates when RBI meets bankers next Tuesday to announce its annual monetary policy, once again intended to tame spiralling inflation.

The economists are not ruling out a hike of the cash reserve ratio (CRR or the portion of deposits to be kept with the RBI), too. A 0.25 per cent hike will bring down the net lendable resources of banks by Rs 12,500 crore, thus, reducing demand for goods and services.

"Rate hike is there for sure this time. Policy rates will be hiked 0.25 per cent to rein in inflationary expectations," said D. K. Joshi, principal economist at rating agency Crisil.

Policy rate include, repo (at which it lends to banks) and reverse repo rate (which it pays on deposits of banks). However, economists are expecting hike in both the rates.

Food prices inched up marginally to 8.76 per cent (8.74 per cent for the previous week) year-on-year (YoY or compared to a year back) till the week ended April 16, the latest data shows. Fruits, meat and onions boosted the priceline during the week, reporting a rise of 11-28.5 per cent.

Prof. N. R. Bhanumurthy of the Delhi-based think tank National Institute of Public Finance and Policy, however, said, "It (RBI) should hike 0.25 per cent in policy rates and signal that the rate hikes have not peaked yet, instead of 0.5 per cent hike in one go. The latter could prove to be a big shock for the financial markets."

"On the other hand, it could raise CRR (or SLR too, which is down at 24 per cent), a liquidity measure that will have a lag effect, unlike policy rate hikes, which are direct measures forcing lending rate hikes," Bhanumurthy added.

The benchmark wholesale price index (WPI) inflation reversed its downward trend and spiralled to 8.98 per cent in March, way above the Centre's projection of around eight per cent. It was up from 8.31 per cent in February.

"High rise in prices is also set to keep inflation on the RBI's agenda for another six months," said Arun Singh, senior economist of global database company, Dun & Bradstreet.

"However, 0.25-0.5 per cent hike in policy rates are unlikely to impact the economy much in the short term," Singh added.

Rising global commodities and fuel inflation have added to food price domestic inflation making it a deadly cocktail for RBI to control. Any further hike in policy rates are expected to affect growth.

Madan Sabnavis, chief economist of the rating agency Credit Analysis and Research Ltd (CARE) said, "Rate hikes should not be resorted to at present. Any further hike will lead to higher interest rates, which affect growth in investments and in turn economic growth."

RBI had done it for eight times now, without yielding much results. Repo and reverse repo rates are at a high of 6.75 per cent and 5.75 per cent, respectively.

Besides, there is no specific sector, consumer durables or auto, that is overheating, for the RBI to target at present juncture, Sabnavis felt. In fact, their prices are falling, of late.

Courtesy: Mail Today