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RBI seen hiking rates again in Oct to cement hawkish inflation stance - Reuters poll

Source : REUTERS
Last Updated: Fri, Oct 25, 2013 11:35 hrs
RBI

The Reserve Bank of India will likely raise its lending rate further on Tuesday, cementing its inflation-fighting credentials despite the country's sputtering economic growth, a Reuters poll showed.

Twenty-nine of 41 economists polled this week expected the central bank will increase the policy repo rate by 25 basis points (bps) to 7.75 percent when it meets on Oct 29.

The median consensus also showed the marginal standing facility, an overnight borrowing rate, would be cut by an equal measure, narrowing the gap between the two lending rates to 100 basis points, which has long been the default setting.

RBI Governor Raghuram Rajan said last month he intended to continue withdrawing liquidity tightening steps put in place this summer to stabilise the slumping Indian rupee. Those measures included a 200 basis point increase in the MSF rate in July.

The MSF rate was cut by 50 basis points to 9.0 percent on October 7 as the rupee clawed back some ground after hitting record lows in August.

"Rajan has been fairly hawkish on inflation and he has also gone to the extent of saying that even if tackling inflation comes at a short-term trade off with growth, he would go for it," said Upasna Bhardwaj, an economist at ING Vysya Bank.

"His school of thought also says that tackling inflation should be the primary mandate of a central bank."

The RBI surprised markets last month by increasing interest rates to 7.50 percent, acknowledging inflation pressures and establishing the central bank's resolve in fighting it, even at the expense of slower growth.

Indeed, India's economic growth will remain under pressure well into next year owing to weak domestic and global demand, while headline inflation will remain elevated, a separate Reuters poll showed this week.

Wholesale price inflation ticked higher to 6.46 percent in September, well above the RBI's commonly perceived comfort level of 5 percent.

Most of the increase was attributed to soaring food prices. Still, economists said Rajan will likely tackle it by raising interest rates, rather than wait for prices to cool after a good monsoon this year.

If the RBI raises the repo rate next week, economists do not expect another increase through March 2015, providing inflation shows some signs of moderating.

"At the moment we expect a pause (after next week's anticipated rate rise), but if the inflation situation changes we will have to revisit that view," said Upasna Bhardwaj, an economist at ING Vysya Bank in Mumbai.

"I would not rule out a change in policy rates going forward. For now we think inflation will continue to inch up and then decline a little because food inflation will come down and also because of exchange rate stability."

The poll also showed the RBI is unlikely to change the cash reserve ratio (CRR) at its meeting, holding it at 4.0 percent.

Commercial banks in India have called for the central bank to reduce the reserve requirement with an aim to abolish it, arguing that the cash earns no interest and is unproductive.

But the reserve provides a key liquidity management tool for the central bank and it has so far only reduced the CRR in measured steps.

"The fact that banks are clamouring for it makes it all the more reason for the central bank not to do it," said Robert Prior-Wandesforde, director of Asia economics at Credit Suisse.

"The CRR, by Indian standards, is very little. It is the lowest it's been for a very long time. I don't think Rajan is ready yet to signal a more accommodative stance by reducing it."

Twelve economists in the poll predicted the RBI will stay put and not hike the repo rate at its Tuesday review, saying the uptick in inflation last month was due to higher food prices, which they expect will ease gradually.

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