Credit Policy: Will RBI pause or raise rates?

Industrial growth is slowing and so is inflation. In circumstances like these should the RBI pause or does it need to raise rates yet again on March 17? CNBC-TV18's Gopika Gopakumar and Vidhi Godiawalla find out what bankers and economists are expecting.

RBI Governor D Subbarao is clearly in a dilemma over inflation management and growth. But Inflation control is expected to remain the central bank's focus in its mid-quarter review on March 17. He said, “For inflation management, we have to raise policy interest rates. For protecting, promoting and preserving recovery, we need to keep interest rates low.”

A CNBC-TV18 poll of bankers and economists shows that 70% of those polled expect the RBI to hike the repo rate by 25 bps to 6.75%. 65% expect a 25 bps hike in the reverse repo rate to 5.75%.

Samiran Chakrabarty, Head of Research at Standard Chartered, said, “RBI till now has clearly communicated the stance that they want to balance between growth and inflation and that's why they want to take a calibrated stance that they want to raise rates. From that perspective 25 bps hike seems to be on the cards.”

The street is more or less convinced that inflation for March-end will come in higher than RBI has forecasted, which is 7%. 80% of the respondents expect March-end inflation to be above 7%; while only 20% see it at 7% or lower.

With the liquidity situation stabilizing, majority believe the RBI will not extend the facility of extra borrowing that banks can do up to 1% of SLR beyond April 8.

So how will actual lending and deposit rates move after the policy?

Majority believe banks will not hike lending or deposit rates immediately even if the RBI moves on policy rates.

Ramnath Pradeep, CMD of Corporation Bank, said “Incase there is an increase in the repo rate and reverse repo rate by may be 25 bps, I think to pass on to the borrowing will be difficult as peak level of the rate has reached on deposit side, so, now to pass on this hike in rate of interest, there could be a question of sustainability.”

Nifty ends with 62 points gains

Indian equity benchmarks rebounded on Wednesday led by short covering after a sharp sell-off seen in previous session on earthquake in Japan. The 50-share NSE Nifty clawed back above the 5500 level, with 62 points gains to close at 5,511, supported by 44 stocks out of 50. But there was some profit booking in late trade while European markets slipped in red, which could be because of rising crude oil prices again, reacting to Middle East tensions.

Huge short covering was seen in Asian markets. The Nikkei 225 Average bounced back with 5.7% gain today to close at 9,094 after consistent fall in previous three sessions - nearly 17% fall – due to massive earthquake & tsunami on Friday followed by blasts in various nuclear plants located in northern region of Japan.

Among other Asian markets Shanghai, Kospi and Taiwan gained 1-1.8%. Straits Times went up 0.9% and Hang Seng up marginally.

The 30-share BSE Sensex rallied 191 points, to end at 18,359. The broader indices too gained 1.3% each. However, European markets slipped in red after initial modest gains - France's CAC, Germany's DAX and Britain's FTSE went down 0.3-1%.

Sensex Northbound

The equity benchmarks recouped all their previous day's losses today on the back of recovery in global markets. But there was some profit booking at higher levels, which could be because of rise in crude oil prices again.

London Brent crude went up by USD 1.6 to USD 110.4 a barrel after Bahraini security forces attempted to clear protesters on Wednesday, rebounding from a three-week low near USD 107 earlier in the day. The Nymex crude was inching up towards USD 99 a barrel at 13:50 hours.

Financial, technology, telecom, infrastructure, oil & gas, metal, realty and cement companies' shares were leading the markets higher. However, HUL, GAIL and Hero Honda were the only losers on the Nifty. About four shares advanced as against one share declined on the National Stock Exchange.

The European markets too were quite supportive in the afternoon trade, after rebound in Asian and the US markets; Germany's DAX went up 1%. France's CAC and Britain's FTSE were flat with positive bias.

The 30-share BSE Sensex was trading at 18,401, up 233 points and the 50-share NSE Nifty gained 72 points at 5,522. The broader indices rallied 1.5% as well.

The news of massive earthquake in Japan followed by tsunami and blasts in nuclear plants, which had left the world markets trembling in previous sessions, seems to be discounted by the markets for the time being. The Japan's Nikkei 225 Average surged 5.7% at close; Shanghai, Kospi and Taiwan gained 1-1.7%.

Heavyweights like TCS, SBI, ICICI Bank and Bharti Airtel rallied 2.5-4%. Reliance Industries, Infosys and ONGC gained 0.7%.

NTPC, L&T, Axis Bank, Sun Pharma, Sterlite, Tata Steel, DLF and SAIL were up 1-2.5%.

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Short Covering

Indian equities benchmarks bounced back sharply on Wednesday morning on the back of short covering as shorts were built up yesterday amid weak global cues.

Recovery in global markets and especially in Japanese shares too led the support as it seems that sentimental effect due to massive 8.9 magnitude quake, tsunami and blasts in nuclear reactors eased for the time being.

Even crude cooled off in international markets on the back of likely lower demand in devastated Japan - world's third largest economy. London Brent crude was trading at below USD 108 a barrel and Nymex crude was below USD 97 a barrel.

Among frontliners, ONGC, IOC, Reliance Industries, Reliance Capital, Reliance Communications, Reliance Power, Reliance Infrastructure, BPCL, Sterlite, Tata Steel, Jaiprakash Associates, M&M, Tata Motors, Dr Reddy's Labs, Ranbaxy Labs, SBI, HDFC and ICICI Bank were supporting the markets.

However, Hero Honda was the only loser on Nifty.

50-share NSE Nifty rallied 54 points to 5,504 and the 30-share BSE Sensed gained 187 points at 18,355. The CNX Midcap went up 65 points to 7,598 and the Nifty Junior rose 99 points to 10,695. 693 shares advanced as against 138 shares declined on National Stock Exchange.