| The RBI hiked the reverse repo rate and the repo rate by 25 basis points (bps) in its review. In an environment of moderate inflation and rising interest rates, the hike came as a surprise to the market. This is the fourth rate increase in 15 months and the reverse repo rate is at its highest in nearly three years. |
| The RBI has tried to act pre-emptively by coming out with this softer increase of the interest rate to keep at bay any inflationary pressure that may stick out on account of an overheated economy and increasing oil prices globally. The RBI has projected a higher growth during this year at 7.5-8 per cent, revised from the earlier 7-7.5 per cent. |
| The RBI had a difficult task of supporting growth at one end, and controlling anticipated inflationary pressure at the other; it chose the latter. Average inflation for the first 9 months of the fiscal stood at 4.5 per cent. However, the pressures from crude oil prices and waning support from the base effect are expected to push the rate upward. The RBI has showed its concern over the inflationary pressure seen through rising prices in assets such as property, equity and gold prices. |
| The finance minister has supported the RBI's view and added that the increase in repo rates by the RBI could be reversed if the global situation improved. There is a growing feeling that US Fed is nearing the end of rate hike cycle and could pause after one or two hikes. |
| The debt market reacted strongly to the hike as the market was not at all prepared for it. Now the market would require a trigger from the authorities in the form of lesser borrowings or infusion of liquidity, which may be cutting the CRR, to climb its way up. Also unwinding of MSBs and increased government spending may kick up the sentiment. On the global front, moderation of oil prices (below $60 a barrel) and a rally in US bond market could act as further sweeteners and improve the debt market. |
| The writer is Managing Director, PNB Gilts |
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