Corporates eye RBI rate cue for expansion | india | Hindustan Times
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Corporates eye RBI rate cue for expansion

india Updated: Dec 12, 2010 21:05 IST
HT Correspondent

Policy-makers and industrialists will be keenly observing cues sent out by Reserve Bank of India (RBI) in its mid-quarter policy review on Thursday amid anticipation that the central bank would signal a pause in interest rates hikes to goad companies into going ahead with planned expansions.

The RBI has raised key policy rates six times so far this year as prices raced into high-double digits pummelled by a supply crunch of staple items.

Inflation has shown signs of cooling - it was 8.58 % in October - but still remains at worrisome levels.

India's annual factory output grew by 10.8% in October - the fastest pace in three months - propelled by a higher purchase of consumer durables such as televisions, refrigerators and cars and also by stronger capital goods output.

The recent data has prompted the debate whether RBI will execute another rate hike.

In November RBI had increased the repo and reverse repo rates each by 0.25 percentage points to 6.25% and 5.25% respectively.

A higher repo, the rate at which RBI lends to lenders, raises the banks' borrowing costs and prompts them to raise interest rates for final home, auto and corporate borrowers.

A higher reverse repo - the rate of interest which RBI pays when it absorbs excess cash from the monetary system - makes it advantageous for banks to park excess funds with RBI, lowering demand and cooling prices.

Most banks have since raised lending rates to borrowers.

"We do not see a case for further generalised rate action during the remainder of this fiscal year," said Rahul Bajoria of Barclays Capital.

Policy tightening, if any, is likely to be more nuanced and targeted towards sectors showing incipient signs of overheating, experts said.

"Extreme tightness in domestic liquidity conditions has raised the cost of working capital and is likely to be an overhang on production," said Sonal Varma of Nomura Financial Advisory and Securities.