Reverse repo rate hike unlikely now

Global situation and internal market conditions not conducive for hike, say bankers.

Following the cue from the government securities auction held on Tuesday, the Reserve Bank of India is likely to pause a while before effecting another 25-basis point hike in the reverse repo rate (one basis point is one hundredth of 1 per cent).

The forthcoming monetary policy review, on July 25, is expected to keep the signalling rate at the current 5.75 level.

According to bankers, the situation across the globe and the internal market conditions do not seem to be conducive for a rate hike.

Although Japan is in the process of raising its interest rate, it cannot be construed as an interest rate increasing stance since the economy has been functioning in an almost zero-interest rate scenario for the last five years.

The statements that followed the last open market committee meeting of the Federal Reserve indicate a slowdown in the hiking of interest rates. It is well supported by not so robust data being released on employment and industrial growth for some time now.

The RBI had raised the reverse repo rate by 25 basis points on June 8, following an increase in rates globally.

The growth in bank credit has been extremely sluggish as interest rates are moving up, and the trend is expected to continue for some time. While banks are raising one-year funds at 8-9 per cent, corporates are mobilising money through three-year commercial papers at 9.25 per cent.

The government securities market has factored in the expectation of a rise in the reverse repo rate, which has, today, pushed up the yield on the 10-year benchmark paper to 8.40 per cent, from yesterday's 8.24 per cent.

The yields on government bonds rose today as the heavy devolvement of yesterday's Rs 7,000 crore bond auction spread nervousness in the market.

Corporates have stopped borrowing through loans and bonds, and banks have also become extremely cautious about investments. The corporate bond market remains sluggish as there is no secondary market trading interest, and this has pushed up rates even further.

Although the central bank is absorbing over Rs 40,000 crore from the financial system on a daily basis, it is still not considered a threat to inflation.

This is because the liquidity is expected to slowly evaporate as the government raises money and corporates avail of loans, as the year progresses. Moreover, even if the flow of foreign exchange continues, it will not be as robust as in the earlier years.

The RBI still continues to stick to the present inflation forecast of 5-5.5 per cent, as it is of the view that most of the recent rise in inflation was due to the passing through of the oil price hike, said a market player. But because of the base effect of the high inflation last year the inflation rate is falling.