RBI may go for further rate hike this fiscal: Economists | business | Hindustan Times
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RBI may go for further rate hike this fiscal: Economists

business Updated: Aug 01, 2010 15:44 IST

The Reserve Bank may go for further tightening of interest rates during this fiscal as part of efforts to tame inflationary pressures, experts believe.

"In view of persistent inflationary pressures, though further monetary tightening by the RBI is expected in the
current fiscal, very aggressive monetary policy actions are unlikely as they could derail the current growth momentum,"
Dun & Bradstreet India Senior Economist Arun Singh said.

Rating agency Crisil's Chief Economist D K Joshi also believes that "they (RBI) will continue with their policy of
raising interest rates. So we will see further interest rate hikes."

RBI last week raised its short-term lending and borrowing rates by 0.25 per cent and 0.50 per cent, respectively.

Experts are of the opinion that containing inflationary pressure is at the fore-front of RBI's policy agenda, as in a
span of three months there has been 50 basis points hike in repo rate and 75 basis points hike in the reverse repo rate.

The RBI's policy actions are expected to be calibrated to contain inflationary expectations while maintaining growth
momentum of the economy, Singh said, adding that D&B expects further hike in repo and reverse repo rate by 25 bps each and CRR by 50 bps during the current fiscal.

However, Deloitte India's Principal Economist Shanto Ghosh believes that monetary policy to tame inflation is only
effective when the cause of the inflation is demand driven.

"This is 'not' the case for India right now," Ghosh said adding that "the right measures should be to increase
agricultural productivity, improving the efficiency of the public distribution system in India and removing constraints
to increase industrial output and productivity."

Ghosh believes a large part of the current inflation is driven by supply bottlenecks and inefficiencies in the
distribution of food grains. Hence, raising interest rates and trying to curb demand will not have too much impact on
containing this supply driven phenomenon.

Some softening in the wholesale price-based inflation, which rose to 10.55 per cent in June is expected when the base effect wears off by the end of this year, increasing industrial output along with the positive impact on
agriculture owing to the estimated normal monsoons.

While, Dun & Bradstreet India' Singh and Crisil's Joshi expects fiscal year-end inflation to be around 6 per cent and
6.5 per cent, respectively, Deloitte India Principal Economist Shanto Ghosh said wholesale price index inflation by the end of this fiscal is likely to be in the range of 7 to 8 per cent.

However, the pace of moderation in headline inflation is expected to be slow given the recent hike in fuel prices.