Sharp increase in interest rates likely by RBI; expect 25 bps hike in repo rate MUMBAI:The Reserve Bank of India may on Tuesday raise interest rates more sharply than expected, investors and economists said, taking their cue from the central banks assessment that inflation and fiscal deficit remain threats though external sector worries have waned. Economic recovery may be delayed to the end of the fiscal year as the government pushes to get infrastructure projects moving again and over-leveraged companies postpone investment decisions, said the Macroeconomic and Monetary Developments report of the Reserve Bank of India that was released on Monday. Business and consumer confidence are low as inflation is expected to accelerate in the next few months, which leaves RBI little option other than to raise interest rates to ensure there are no price shocks. In the growth-inflation dynamics, inflation is emerging as a larger concern, said Saugata Bhattacharya, chief economist at Axis Bank. Since the report talks about normalisation of exceptional liquidity measures, we sense that RBI will increase repo rates by 25 basis points. A 50-basis point hike in repo with no change in MSF (marginal standing facility) is also a possibility, said Saugata Bhattacharya of Axis Bank. One basis point is one-hundredth of a percentage point. Sharp increase in interest raise likely by RBI; expect 25 bps hike in repo rate RBI Governor Raghuram Rajan has silenced proponents of growth seeking interest rate reductions to revive the economy through higher investment since taking over in September. Thats in keeping with his background as an economist of the Chicago school, renowned for its anti-inflation stance. Inflation based on the wholesale price index in September was 6.46%, well above RBIs comfort level of 5%. The repo rate, at which the central bank lends to banks, may be raised by 25 basis points to 7.75% on Tuesday, according to a poll of economists by ET. It may lower the MSF rate by an equivalent amount to ease liquidity further for banks that would see the differential with the repo narrow to 100 basis points, marking a return to what it used to be before the currency slide in July. The cash reserve ratio and the statutory liquidity ratio are seen unchanged at 4% and 23%, respectively. Once banks exhaust the limit on borrowing through the repo window, they can do so through MSF, so a reduction in the latter leads to a boost in liquidity. An emerging area of concern is the fiscal deficit, despite Finance Minister P Chidambarams repeated assurances that the target of 4.8% of gross domestic product will not be breached. Macroeconomic risks still exist with some upward pressure on inflation and the possibility of fiscal slippage, thus posing new challenges, the report said. Containing the fiscal deficit in 2013-14 within the budgetary limit could be a challenge for the government, given the level of gross fiscal deficit during the current fiscal so far. RBI also highlighted risks to budgetary targets arising from the slow pace of disinvestment this year. The government has raised just Rs 1,430 crore of the Rs 40,000 crore asset-sale target with barely five months to go for the fiscal year.
Posted on: Tue, 29 Oct 2013 05:08:00 +0000
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