RBI MAY HIKE KEY RATES 25 BPS

Faced with the unenviable task of balancing inflation and growth, the Reserve Bank of India is likely to hike key policy rates (reverse repo and repo) by 25 basis points, said bankers and experts.

Most analysts and experts believe that the high wholesale price inflation rate at 9.01 per cent, for the week ended May 28, is reason enough for the RBI to continue with its anti-inflationary stance.

But, according to some bankers, the slowdown in industrial production to 6.3 per cent in April (from 7.3 per cent in March) may prompt the central bank to take a pause from its rate hikes and maintain status quo. The slowdown is also why the RBI will revert to its ‘calibrated approach' of a 25 bps hike, instead of persisting with a 50 bps hike as it did in the April policy, said bankers.

The central bank's mid-quarter policy review meet is on June 16.

Growth slows

According to Dr Rupa Rege Nitsure, Chief Economist, Bank of Baroda, the growth inflation trade-off has become very sensitive. “The RBI has tightened rates substantially and the desired impact is being seen in the industrial production figures. There is slowdown in construction and auto sales. The absorptive capacity of small and medium enterprises is not very high. So, it is likely that the RBI will go back to its calibrated approach, as its concern is now more tilted towards growth.” she said.

Besides, people's resilience to inflation has improved as there is no evident slowdown in consumption, Dr Nitsure added.

Food prices set to rise further

There is also an expectation that rate hikes by the RBI will not help much in reducing the current inflation which is predominantly led by rise in food prices. For this, the RBI will have to work jointly with the Central government, said Mr Madan Sabnavis, Chief Economist of CARE Ratings.

“The last successive four quarters have shown signs of slowdown in growth. So, the RBI will hike rates only by 25 basis points despite inflation touching 9 per cent,'' he said.

With the Government increasing the minimum support price for almost all kharif crops by around 10 per cent, food prices are set to rise even more, Mr Sabnavis added.

However, according to Mr Moses Harding, Executive Vice-President, Head Global markets Group, IndusInd Bank, the RBI is likely to refrain from hiking rates in the June policy, given the sharp downtrend in the industrial production data and the uptrend in inflation. “Considering that there is a risk of another round of fuel price hike and commodity prices inching up, I don't think the RBI can afford another rate hike,'' Mr Harding said.

The borrowing costs of corporates are already high and operating margins are under pressure. Even if the RBI refrains from hiking policy rates, interest rates are likely to remain at elevated levels, due to the liquidity shortage. So, unless corporates are able to manage the high cost of borrowing, it will worsen the situation, he added.

“Rate hikes by the RBI since March have done nothing to bring down food price led inflation. Now, the focus has shifted to fuel price inflation. But monetary policy action alone cannot address either food or fuel price led inflation. Non-monetary factors should drive the inflation control,” he added.

SOURCE: http://www.thehindubusinessline.com/industry-and-economy/banking/article2099117.ece