More rate hikes likely by RBI!

Rohit Joshi & Siddharth Tak/ ZRG/Delhi @ZRG_DNA

On Tuesday, the Reserve Bank of India (RBI) released its quarterly monetary policy review for the second quarter of fiscal 2013-14 and the policy came in as per the expectations of analyst community. Experts seem to be in unanimity with regard to the possibility of more rate hikes in the coming months if inflation remains above the comfort zone of RBI.

While the RBI raised repo rate by 25 basis points (bps) to 7.75 percent, it has kept cash reserve ratio (CRR) unchanged at 4.0 percent. Furthermore, RBI has reduced the marginal standing facility (MSF) rate by 25 bps to 8.75 percent.

However, the positive surprise was that liquidity was enhanced through term repos of 7-day and 14-day tenor from 0.25 percent of net demand and time liability (NDTL) of the banking system to 0.5 percent with immediate effect. Owing to this move, banking shares were in demand and the Bank Nifty (NSE banking shares index) rose by 4.35 percent. Consequently, Nifty jumped by 1.96 percent and closed at levels of 6221 because of the liquidity enhancing measures.

Commenting on the monetary policy, Brinda Jagirdar, consulting economist (former chief economist at SBI) said, “This (repo rate) increase is in line with the global environment and macro-economic data.”

Talking about the liquidity enhancing measures, Jagirdar said, “As CAD has narrowed down and rupee has stabilized hence RBI has brought down the MSF rate. Liquidity will further increase through term repos of 7-day and 14-day tenor and this will help the market to discover the proper yield curve. It will allow banks to borrow more under these terms.”

Referring to the possibility where one can witness more repo rate hikes in the future, Madan Sabnavis, chief economist at CARE Ratings averred, “The fact is that policy makers are seriously trying to control inflation. It appears that they want to target the inflation rate. However, if inflation inches up in the coming months then RBI can increase the rate further.”

Likewise, DK Joshi, chief economist at Crisil opined, “Going forward, as long as inflation remains above the comfort zone, RBI will maintain its hawkish stance. We have already seen the upward risk play out which was due to currency weakening. Raghuram Rajan’s monetary policy is a prudent one as to bring inflation under control is the need of hour. Eventually, bringing inflation down is also positive for the growth in the medium term.”

Rejecting the hypothesis that RBI has put the growth on the backburner, Jagirdar said, “Raghuram Rajan is prioritizing the things and not putting growth on the back burner. His approach is balanced and consistent. The RBI will continue to support growth but at the same time it is required that some steps are taken by the government immediately.”

“It is difficult to say that RBI will increase the repo rate in the next policy review which is due on December 18. Rajan is not saying that he will continuously increase the repo rate,” she added.