Market bets on 25 bps reverse repo rate hike

Curtain raiser: MONETARY POLICY

An increasing number of bond dealers is betting on a possible reverse repo rate hike by the Reserve Bank of India (RBI) in its quarterly review of the monetary policy on July 26.

In its last two policy announcements in April and October, the RBI had hiked the reverse repo rate by 25 basis points (one basis point is one hundredth of a percentage point) each to 5 per cent.

Bond dealers and senior bankers expect the RBI to hike the reverse repo rate by another 25 basis points to 5.25 per cent. Reverse repo rate "" the rate at which the RBI sucks out liquidity from the system ""is a short-term benchmark that moves the bond market.

Forty-eight hours before the presentation of the quarterly review, Business Standard spoke to 10 bond dealers and eight senior bankers over the weekend for their opinion on the possible RBI action on Tuesday. An overwhelming majority said there would be a quarter percentage hike in reverse repo rate.

Some of them even felt that the RBI might go for a hike in reverse repo rate as well as bank rate, which is currently pegged at 6 per cent.

Finance minister P Chidambaram's veiled warning against an asset bubble in the equity market on Friday rekindled the expectations of a rate hike, which was to some extent diminished when the Indian currency hit a new high on Thursday following revaluation of the Chinese currency.

Significantly, Chidambaram "" who had a one-hour meeting with RBI Governor YV Reddy on Friday -- talked about liquidity in the system, but refrained from making any comment on 'benign' interest rates.

Against the backdrop of rising oil prices, in its April policy, Reddy had said: "In the face of a significant supply shock, it is not prudent for monetary policy to be overly accommodative."

Since then, the global oil price has gone up by close to 20 per cent. Even though the wholesale price-based inflation (WPI) is 4.14 per cent now, bankers argue that it is bound to go up once the base effect wears off. The liquidity in the system is not tight but certainly less comfortable than what it was in April.

Two other factors can contribute to a rate hike decision, higher industrial growth and a very high credit offtake. Despite a strong base, end-June non-food credit stood nearly 30 per cent higher over year ago figure, much higher than the RBI's estimate of 19 per cent. This and a nine-year high industrial production in May, bankers feel, will prompt the RBI governor to tighten the policy.

"Reddy will take a calibrated approach. Probably we will see another rate hike -- in both reverse repo as well as bank rate -- in October," says a bond dealer.