Thursday, June 16, 2011

RBI credit policy: Benchmark interest rates raised by 25 bps to cool inflation

NEW DELHI: The Reserve Bank of India on Thursday raised its benchmark rates by 25 basis points to 7.50 per cent, hiked reverse repo rates by 25 bps to 6.50 per cent in a move to arrest surging inflation in Asia's third largest economy.

Other policy rates such as the statutory liquidity ratio and the cash reserve ratio - the minimum quantum of money against deposits which the banks have to retain as cash or specified government securities - have been left untouched.

Some short-term deceleration in growth may be unavoidable in bringing inflation under control and the central bank needs to persist with its anti-inflationary stance, the Reserve Bank of India said in its mid-quarter policy review

"The increase confirms determination of policymakers to continue to fight stubbornly high inflation. We expect at least one more hike this year, in Q3, but there is a possibility of more if inflation doesn't stabilise by then.The RBI statement is hawkish. The comments are likely to keep short INR OIS rates high but may lead to curve flattening as growth slowdown will bring long rates lower. Little impact on the FX seen.", ssid Dariusz Kowalczyk, Senior Economist and strategist at Credit Agricole CIB in Hong Kong..

"A 25 basis points rate hike was warranted. Growth is slowing and the downside risks to growth have increased. Inflation reacts both to rate hikes and growth with a lag, so we had expected 75 basis points of rate hikes for 2011, but we won't add to that. I see the repo rate at 8 percent by December.", opined Ramya Suryanarayanan, Economist at DBS Bank in Singapore.

"Based on the current and evolving growth and inflation scenario, the Reserve Bank will need to persist with its anti-inflationary stance of monetary policy," the central bank said in its mid-quarter review of credit policy.

"Domestically, inflation persists at uncomfortable levels. Moreover, the headline numbers understate the pressures because fuel prices have yet to reflect global crude prices," it said.

India has slowly drifted to a downward growth trajectory projected by slowdown in Industrial Production data that came last week. The latest data showed growth of 6.3 per cent after growth of 13.1 per cent in the same month a year ago. The data was however first of a new series with different base year of 2004/05, new components and weightings.

Slowdown in imports, exports all point towards slowdown in the economy hence further rate hikes will hamper growth in Asia's third largest economy.

Well most traders and analysts expects another 50-75 bps hike for the rest of the year before RBI pull the plug on interest rate hikes.

Weekly inflation data for June showed India's food price index rose 8.96 percent and the fuel price index climbed 12.84 percent in the year to June 4.

Inflation rose higher than expected in the month of May. The WPI rose an annual 9.06 per cent pressuring RBI to tighten monetary policy further and at the same time arresting India's growth in the process. Higher borrowing costs, rising input prices and strict banking rules will make it hard for companies to take credit and in turn impede production activity going forward.

The Reserve Bank of India has raised its policy rate by a total of 275 basis points in ten moves since March 2010. But its rate tightening moves have failed to bring inflation, which was 9.06 percent in May, to its comfort zone of 4-5 percent. 

Source : ET

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