RBI likely to hike rates on Friday amid soaring inflation

Home and auto loan borrowers have to brace up for another rate hike as the Reserve Bank of India (RBI) is expected to hike policy rates by 0.25 per cent on Friday when it meets for a mid-quarter review of monetary policy. The move would be intended at taming the persistently high inflation.

Friday's anticipated hike is being billed as the last in the current rate hike cycle, on the hope that the prices of global commodities like fuel and metals would come down in the wake of the slowdown in developed economies that are facing job losses and sovereign debt problems.

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Even then, floating rate borrowers who have seen their interest costs mounting over the last 18 months, would have to wait for at least nine months before their borrowing costs start looking down, economists said.

"Wednesday's inflation further strengthens the case for a 25 basis points (bps or one hundredth of a percentage) rate hike at the RBI's policy review on Friday," said Rohini Malkani of Citigroup.

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"Given a rapidly deteriorating global environment which has resulted in most other central banks pausing (UK, South Korea, Malaysia and Philippines) and Brazil cutting rates, we are maintaining our view of a pause in rates (in India) post-Friday," he added.

LIGHT AT THE END OF THE TUNNEL Friday's anticipated hike may be the last in the current rate hike cycle, on the hope that prices of fuel and metals would come down due to slowdown in developed economies However, floating rate borrowers would have to wait for at least nine months before borrowing costs start coming down WPI inflation for August turned out to be 9.78%, much above expectations of 9.6% Inflation remains the main concern for RBI, which has hiked policy rates 11 times since March 2010 There are some signs of demand moderating in the recent months along with growth moderation Economists predict that the economy would moderate to below 8% in this fiscal

Inflation measured by the wholesale price index (WPI) for August turned out to be 9.78 per cent compared to year ago, much above the consensus expectations of 9.6 per cent. Meanwhile, the June WPI headline inflation number was revised up by seven bps to 9.51 per cent.

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Inflation would remain the main concern for RBI, which hiked policy rates 11 times since March 2010 to tame the demon even at the cost of growth.

"Inflationary expectations are slightly higher in the short-to medium-term. The primary impact of the fuel price (petrol, diesel and cooking gas) hikes is visible now. Its secondary impact will take three to six months to pass through the industrial product prices," said Professor N.R. Bhanumurthy of the National Institute of Public Finance and Policy (NIPFP), while stating that the markets have already discounted a 0.25 per cent hike.

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Inflation, which started off as a supply-driven phenomenon, has turned demand-driven over the last few months, percolating deep into manufacturing sector prices. However, there are visible signs of demand moderating in the recent months along with growth moderation. Many economists predict that the economy would moderate to below eight per cent in the current fiscal.

"In an era of loose fiscal policy, monetary policy has limited impact on inflation control. Going forward, inflation is likely to remain high," said Devendra Pant, director, Fitch Ratings.

RBI had also been highlighting the need for cutting government expenditure and its flagship scheme - National Rural Employment Guarantee Scheme - to aim at productivity, to reduce their impact on inflation.

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Tomo Kinoshita, economist of Nomura said, "We expect headline inflation to stay around nine per cent until November, primarily due to demand pressures and a base effect before falling sharply in December to below eight per cent." However, policy rate reversals are unlikely to start immediately.

Responding to a query, Bhanumurthy said, "Unless RBI is confident that inflationary expectations have stabilised or moderated it will not slash policy rates. As such we cannot expect it to happen anytime before the April 2012 annual monetary policy."

Banks may not respond to policy rate cuts immediately and could take a couple of months more for passing on the benefit of lower rates to their customers.

Courtesy: Mail Today

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