Clamoring voices that an "inflation monster" is on the prowl are muted now. Economists from China, Russia, Brazil and UK are instead humming to "peak" and "pause" tunes. That has set the tone for the trigger-happy central bank in India to bring its
monetary tightening cycle to a halt.
The decision to pause or not will come under discussion when the
Reserve Bank of India's, or RBI's, top directors review the first quarter in its monetary policy statement for 2011/12 on Tuesday.
If
Duvurri Subbarao hikes the rate by 25 basis points, as is widely believed, it would probably be among the last few hikes for the year. In fact, that would probably be the RBI Governor's last decision as his three-year term ends in September this year. And even if it is not (assuming he gets an extension), the RBI Governor will not have to resort to aggressive hikes of almost three percentage points as he has in the past year.
There is a wide and growing consensus on peaking of the interest rate cycle. "I don't expect a three or four percentage points increase from here. The increase could be at most 25 to 50 basis points," the CEO of HDFC Bank, Aditya Puri, said last week. Citigroup Global Markets, too, in its latest report forecasts "RBI hiking rates by a further 50 basis points taking the repo rate to 8 per cent by December 2011".
The substantial hike in the interest rate has already taken a toll on the market. The
Index of Industrial Production , or IIP, numbers recently dipped to a nine-month low of 5.6 per cent in May this year. With consumer demand for cars and other items also hitting the brakes, bankers are crying foul. The banks' credit off-take has slowed down and the existing loans given to corporates are showing resistance to rate hikes. The result: the government has lowered India's GDP projection for 2011/12 to 8.6 per cent from the earlier estimate of about 9 per cent.
Read how you can deal with rising interest rates and still get that loan Options for central bankers become very limited when the gross domestic product growth or GDP - an indicator of the prosperity of an economy - takes a backseat.
The interest rate hikes had obviously been meant to check inflation. Even now, headline inflation, at 9.44 per cent, is close to double the comfort zone of 5 to 6 per cent. That number also did not factor the June 26 fuel price hike - which lead to higher diesel, LPG and kerosene prices.
But signs of
inflation receding are also clear and present. A recent report from Japan's Nomura has said the inflation in protein-rich food items like pulses, milk, eggs, meat and fish moderated to 7.5 per cent year-on-year in the first half of 2011, after a steep rise of 15 per cent and 25 per cent in 2009 and 2010 respectively.
READ: Rate hike alone cannot battle inflation, says KV Kamath In the widespread consensus, industry chambers will call for putting a stop to rate hikes and there would certainly be similar advisory from the North Block.
Governor Subbarao will also have a tough task convincing his colleagues. In the last meeting, only two of six members voted for an unexpected 50 basis points hike. The majority was for a token 25 basis points hike.
So, what will Subbarao's parting shot be?
Best banks to take loan from 
Special 
