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Rate hike amid price panic

business Updated: Jun 17, 2011 01:36 IST
HT Correspondent
HT Correspondent
Hindustan Times
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The Reserve Bank of India, as expected, squeezed money supply on Thursday by raising the repo rate by 25 basis points, or 0.25 percentage points, taking to 7.5% the policy signal rate used to drive the price of bank loans.

RBI’s latest move is the tenth such rate hike in the past 15 months. Though that could hurt growth — as the central bank itself admitted — RBI’s idea is to reduce demand pressures on the economy in its battle against high inflation that hovers over the economy.

The RBI also raised the reverse repo by 25 basis points to take it to 6.5%. The repo is the rate at which it lends to banks and the reverse rate is the one at which parks bank funds.

Governor Duvvuri Subbarao took into account the fact that India’s state-guided petroleum fuel prices still lag global levels, leaving “headline inflation” vulnerable to a further jump.

“Domestic inflation remains high and much above the comfort zone of the Reserve Bank. Domestic fuel prices do not yet reflect the current trends of global prices,” the policy statement said.

“The Reserve Bank will need to persist with its anti-inflationary stance of monetary policy,” it said.

Economists say inflation can hit double digits again, repeating the spectre seen between February and July 2010. This means RBI may go for a couple of more rate hikes.

Abheek Barua, chief economist, HDFC Bank, said “pipeline pressures” on input prices, diesel and key government-controlled food items could bring back double-digit inflation by July-August.

“This is likely to drive the RBI to hike its repo rate by at least another 50 basis points over the remainder of the fiscal year,” he said.

But some, like Sanjay Mathur, Asia strategist at Royal Bank of Scotland, said RBI may not tighten money supply too aggressively to avoid past mistakes as “a double fault at this stage could be costly.”

While inflation is a cause of concern, RBI feels that rate hikes are not de-railing the growth momentum as yet, and is ready to face a pinch in economic expansion.

“The monetary policy stance remains firmly anti-inflationary, recognising that, in the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control,” the RBI statement said.

It added that broad indicators such as fourth quarter profit growth, margins and credit growth do not suggest a sharp or broad-based deceleration.

Experts believe the policy stance may disappoint those who expected some relief on account of the latest weakness in the growth data. RBI’s policy is also influenced by downside risks to global growth prospects, such high oil prices, fallouts of Japan’s earthquake this year and debt crises in European economies.

“From our monetary policy perspective, global commodity prices still remain the key external risk,” the RBI said.