In line with street expectations, the
Reserve Bank of India raised key interest rates by 25 basis points. The repo rate, at which the RBI lends to banks, has been upped to 6.5% from 6.25% and the reverse repo rate, at which it borrows from banks, to 5.5% from 5.25%.
The cash reserve ratio (which is the percentage of their deposits that banks must keep with the
RBI as cash) and statutory liquidity ratio (SLR), however, have been left unchanged. Thus,
CRR and SLR continue to stand at 6% and 24%, respectively.
The bank also lifted its headline inflation projection for March 2011 to 7% from 5.5% previously, and said it expected inflation to begin moderating again in the first quarter of the fiscal year. It, however, stuck with its 8.5% GDP growth forecast for the current fiscal year, but with an upside bias.
What lies ahead?
While the 25 basis point rises were expected, a growing number of experts had said that a 50 basis point increase was needed. In fact many of them still believe that the RBI will continue raising rates going forward.
Not surprised with RBI trying to balance out managing inflation cost primarily by supply side factors and at the same time ensuring that interest rates while moving higher do not completely derail growth, Sonal Varma, India Economist, Nomura Financial Advisory & Securities (India) said the approach of 25 bps seems like a prudent approach.
However, she was quick to add that it is likely that we will see rate hikes in the coming two policy meetings as well. "In the first quarter of FY12, the RBI expects some moderation in the inflation trajectory. And, I am presuming that a lot of the moderation that the RBI is expecting is actually because of the base effect itself—there are risks that inflation may not moderate as much as it expects in the April-June quarter also. So to that extent there is a risk of rate hike there."
To this, Jay Shankar chief economist at Religare Capital Markets added, "Today's policy rate implies that the way forward is likely to be a very uphill task. We may even have an inter-policy rate hike and a very aggressive tightening on March 17."
Dr C Rangarajan chairman of the Economic Advisory Council to the Prime Minister firmly believes the Reserve Bank of India has taken the right step in increasing rates by 25 bps. "I expect the RBI to continue to raise rates going forward," he said.
"Going forward we expect RBI to continue tightening monetary policy given the sustained high inflationary pressures due to high food and international commodity prices, even as growth remains reasonably strong. We expect a 25bps hike in the March policy meeting and a cumulative 100bps hike in policy rates in calendar year 2011. Monetary policy tightening along with sustained high inflation will result in domestic demand momentum moderating a bit in FY12, which will create the much needed slack in the economy for inflation to moderate. We expect GDP growth of 7.7% in FY12, slower than 8.6% in FY11," said Ashutosh Datar economist at IIFL.
Rupa Rege Nitsure chief economist at Bank of Baroda also said, “Today's move clearly shows that the RBI has re-launched its attack on inflation given the persistence of inflationary pressures. I expect them to frontload the rate hikes in the January-March quarter as in the next financial year. There will be limited room because of the expected large sized government borrowing programme. There are lots of uncertainties on the fiscal front and the foreign institutional-investors front but I am expecting another 25 basis points increase in the next mid-quarter review as well."
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