Rate hike looks certain; will it be on July 29?

Rate hike looks certain; will it be on July 29?

Mumbai, July 11 With inflation touching 11.89 per cent for the week ended June 28, bankers and analysts expect a further hike in Repo rate or CRR by at least 25 basis points. However, opinion is divided on whether the central bank will hike the rates in the monetary policy to be announced on July 29 or later.

The headline inflation for the week ended June 28 was at 11.89 per cent, against 11.63 in the earlier week.

When the Reserve Bank of India hiked the repo and CRR rates by 50 basis points each last month, it stated that the monetary policy stance is to avoid further intensification of inflationary pressures and to firmly anchor inflation expectations. This, according to analysts, is an indication that the central bank will not refrain from further monetary tightening, in order to rein in high prices.

On June 24, the RBI hiked repo rates to 8.5 per cent and the CRR to 8.75 per cent in two tranches.

According to Ms Sonal Varma, India economist, Lehman Brothers, the RBI is likely to hike repo rates by 25 basis points in the monetary policy, while a hike of 50 basis points in the CRR could happen anytime in the July–September quarter.

Key challenge

The key challenge before the RBI now is to try and prevent the second round effects of inflation, such as producers passing on higher input cost to consumers and workers demanding increase in wages due to higher cost of living, Ms Varma said.

"The RBI has already hiked interest rates to moderate credit growth and we expect them to maintain their tightening bias. The rate hikes should help slow down credit growth," she said.

The RBI is more likely to focus on CRR, because the money supply has been more than the targeted level, in the last two years, said Mr Dharmakirti Joshi, Director and Principal Economist, Crisil. "A 25 basis point hike in CRR is almost certain. It is a blunt instrument and will have an immediate impact in absorbing money supply," he said.

A hike of 25 basis points in repo was also likely, he added.

"The impact of the measures taken by RBI will be felt more in 2009-10, than in this year. Inflation control measures always work with a lag of one year. First, the GDP growth will slow down, and then inflation will begin to go down. So, the immediate impact is on inflation expectation. But there are also other uncertainties such as oil prices," he said.

'Likely after Policy'

Mr Sundeep Bhandari, Managing Director and Head-global markets, South Asia, Standard Chartered Bank, said the review of the monetary policy would make strong statements about inflation, oil prices and the global environment. However, he is of the opinion that the rate hikes may happen after the Policy. "There may be 50 basis point repo rate hike and a 25 basis point CRR hike after the policy. The RBI will closely watch inflation which could cross 12 per cent," he said.

Mr Abhijit Sen, Chief Financial Officer, Citi India, is also of the view that a hike in rates is unnecessary at this point of time. "With a good monsoon and the recent fall in oil prices, there is an expectation that inflation levels will come down. This, coupled with slowdown in growth, renders a rate hike unnecessary," he said.

Hawkish stance

Mr R.V.S. Sridhar, Senior Vice-President, Treasury, Axis Bank, said the RBI may take a hawkish stance in the Credit Policy and provide its rationale on some its measures.

"We hope to see some comment on RBI's forex policy, since it has allowed the rupee to weaken even as inflation as well as commodity prices have gone up. Also, the RBI's projection of inflation in the near term would provide a cue about what we can expect in terms of action," Mr Sridhar said.

The RBI's projection of inflation has so far been in the range of 5-5.5 per cent in the near term.