Is a rate hike inevitable?
Those looking at benign interest rates may have to brace for a cruel April, as the 9.9 per cent inflation figure for February, just short of double digits, has kindled talk that the Reserve Bank could tighten interest rates.business Updated: Mar 15, 2010 22:43 IST
Those looking at benign interest rates may have to brace for a cruel April, as the 9.9 per cent inflation figure for February, just short of double digits, has kindled talk that the Reserve Bank could tighten interest rates.
In the backdrop of rebounding industry and a bounceback in overall gross domestic product (GDP), the case for softer rates are also ebbing from the side of growth-seekers.
The latest inflation data is already higher than RBI’s 8.5 per cent forecast by end-March.
RBI meets on April 20 for its annual policy review. Economists expect it to increase the repo rate, the short-term rate at which commercial banks borrow from the central bank. That could send a signal for banks to make loans costlier for individuals and firms.
“The RBI has ruled out an inter-meeting (decisions taken between quarterly policy review meetings), so we expect the rate hiking cycle to begin at the April 20 policy meeting,” said Sonal Varma of Nomura Financial.
In January, the RBI had kept interest rates on hold, but hiked the cash reserve ratio (CRR)—the proportion of funds banks have to park with the central bank—by 0.75 percentage points to 5.75 per cent to squeeze out cash from the market.
The repo rate was then unchanged at 4.75 per cent.
Kaushik Basu, chief economic advisor, said there is time to see if inflation was under control. Industrial output rose 16.7 per cent year-on-year in January, after 17.6 per cent in December. “April will be the right time for the RBI to transition to action via policy rates ( repo rate) as it tries to normalise rates in baby steps,” said Rajeev Malik of Macquarie Securities.