The Reserve Bank of India (RBI), walking the tightrope of taking measures to rein in inflation while ensuring steady growth, may yet again favour a slight increase in key rates at its mid-quarter review of monetary policy on September 16.
Bankers and economists expect the RBI to increase repo rate by 25 basis points, its fifth increase this year. Inflation will remain the key target for the central bank as it has been in most of its policy announcements this year as also in the Annual Report on August 25. RBI has raised repo rates by 100 basis points this year, including twice in July.
The highest IPP figures in three months of 13.8 per cent for July, an 8.8 per cent GDP growth in first quarter and close to double-digit inflation figures, and 11.47 per cent growth in food inflation could force RBI’s decision in favour of raising rates to make the cost of borrowing a bit more expensive.
“The potential gain to the economy from inflation control is likely to be widespread and far outweigh any rise in borrowing costs,” said Krishnamurthy Harihar, treasurer at FirstRand Bank in Mumbai. “RBI may stick to its stand of raising rates in ‘baby-steps’ so as not to disrupt the growth momentum.”
RBI has voiced its concern at inflation getting generalised and also sought measures other than just monetary policy, including addressing structural constraints, to curb generalised inflation. Sale of automobiles including two-wheelers, commercial vehicles and cars, rose to a record in August, reflecting the muted impact of rise in rates by RBI so far.
Some analysts expect the central bank to further narrow the repo-reverse repo corridor to lift the minimum rate at which overnight money is available. It’s likely to leave unchanged the cash reserve ratio, as any increase in the requirement could reduce availability of liquidity in the system and upset growth momentum, say bankers. Many companies have absorbed the rise in interest rates by squeezing margins. Any further rise in rates could push them to begin passing on the rise in burden and potentially discourage fringe buyers, say bankers.
The cost of borrowing for companies has risen to some extent following the RBI rate hikes this year, with the rise in rates in money market instruments and increase in benchmark prime lending rate by banks on loans taken prior to July 1, as also the deposit rates. Some bankers expect further rise in policy rates to begin pushing up the new base rate and have some impact on the demand.
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“Any rise in rates will also show some sympathy towards savers,” said a banker. “Low real rates for a sustained period of time could discourage savings and induce spending.”
Still, RBI is in a far better situation than it was before the July 27 policy, bankers say. The monsoon, key to India’s agricultural growth, has been widespread and closer to its long-term average, reducing concerns on the farm supplies and food output. Acceleration of inflation rate may begin to slow on a year-on-year comparison, and as prices of global oil and other commodities hold. The Bank of England last week left its key rate unchanged, raising hopes of a recovery in growth.