Mumbai,January 28 :IN the wake of accelerating economic activity and rising prices, the Reserve Bank of India ( RBI) is expected to not only hike the cash reserve ratio ( a portion of bank deposits kept as cash reserves with the RBI), but also tinker with the key policy rates on Friday.
Though bankers are expecting only a hike in CRR by 0.25- 0.5 per cent, economists feel the RBI cannot afford to wait for various factors, including inflation and growth, to threaten the economic balance before hiking the policy rates.
The repo rate ( at which RBI lends to banks) and the reverse repo rate ( at which banks are paid on their overnight deposits with RBI) are the policy rate tools through which RBI sends signals of a hardening interest rate regime.
Professor N. R. Bhanumurthy of the National Institute of Public Finance and Policy, said, “ We are not expecting any policy rate hikes right now. The RBI is expected to hike CRR in a bid to mop up liquidity. If policy rates are hiked, that will be a surprise.”
Even the markets, including money and equity markets, have discounted a 0.25- 0.5 per cent hike in CRR in the policy, based on the latest inflation and industrial production figures.
Inflation measured by the movement in wholesale price index (WPI) shot up to 7.31 per cent in December, 2009, from 4.78 per cent in the previous month, which is above the 6.5 per cent inflation rate RBI had projected for end-March, 2010.
Industrial production for November, 2009 crossed 11 per cent and based on the December core sector growth of over six per cent industrial production for the month is expected to be, at least, in double digits.
A. Prasanna, head-research of ICICI Securities PD, is of the view that besides a 0.50 per cent hike in CRR, RBI would also hike both the policy rates by 0.25 per cent, to avoid any piquant situations arising from the expected rise in inflation later.
RBI had been stating that as a measure of precaution against rising inflation and to protect the balance in the long- term economic growth, it would ‘ exit’ the soft interest rate policy once strong signs of sustainable growth are seen.
In a recent note on inflation, Sonal Varma, India economist of Nomura Financial Advisory and Securities ( India), said, “ We believe that a gradual policy normalisation through liquidity withdrawal and a higher policy rate is preferable to steeper rate hikes later on. We expect the rate hiking cycle to begin later this month.” The only hope is that the Centre may prevail upon RBI not to resort to rate hikes at this juncture, citing it could derail the accelerating growth, which is yet to assume sustainable pace.
However, finance minister Pranab Mukherjee himself had been expressing concerns over the spiralling inflation.
Food price inflation that had stopped short of touching the 20 per cent year- on- year figure a few weeks back has now receded, but remained above the 15 per cent level. This is expected to creep into the manufacturing segment in the next few months taking the WPI inflation closer to double digits.
“ At the current pace, inflation is likely to rise above eight per cent in January and inch closer to double- digits by March,” Varma said. This would happen once the inflation shifts from supply- side constraints to a demand- driven one in a few months time, which would force the hiking of policy rates.
ON THE CARDS
RBI may hike repo and reverse repo rates along with CRR
Analysts feel RBI cannot afford to wait for things to get out of hand
Bankers expect only a 0.25- 0.5 per cent hike in CRR
Markets have discounted a 0.25- 0.5 per cent hike in CRR
Centre may prevail upon RBI not to resort to rate hikes
Experts feel the rate hiking cycle will begin soon