Inflation to remain the centre-point for RBI: experts

Experts say MSF rate will also remain in focus

The Reserve Bank of India (RBI) raised its policy interest rate for the second time in as many months on Tuesday, warning that inflation is likely to remain elevated for the rest of the fiscal year, and rolled back an emergency measure put in place to support the slumping rupee.

The central bank lifted its policy repo rate by 25 basis points (bps) to 7.75%, in line with the expectations of most analysts, despite the risks to an economy beset by sluggish growth. The banks' cash reserve ratio was held at 4%.

Expert views:

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:

"The RBI policy has certainly become more transparent as it has fulfilled market expectations of 25 bps hike in repo and 25 bps cut in MSF. As market expectations have been fulfilled there will not be any knee-jerk reaction across financial markets.

"Normalisation of the exceptional measures and the provision of additional liquidity support is positive for both the bond and credit markets. However, the reduction in the GDP estimate and increase in the inflation forecast underscores the possibility that India is passing through a stagflationary phase making the working of monetary policy in isolation difficult.

"Going ahead, there will have to be better co-ordination between monetary, fiscal and exchange rate policy in order to be able to tide over the current stagflationary phase."

GAGAN BANGA, MD & CEO, INDIABULLS HOUSING FINANCE, MUMBAI:

"Reducing the MSF rate by 25 basis points and improving the liquidity provided through term repos will reduce short-term rates, which will keep interest rates on home loans stable.

"Hike in the repo rate shows that the monetary policy continues to address the persistent inflation, which remains high when compared with other emerging market economies. Growth for now will have to be addressed by removing infrastructure bottlenecks and other structural policy measures."

ANJALI VERMA, CHIEF ECONOMIST AT PHILIPCAPITAL:

"The policy is exactly in line with expectations. I think the MSF (Marginal Standing Facility) will remain the operational rate for now given the liquidity conditions. Going ahead, the RBI will watch both the WPI and CPI for its rate decisions."

RADHIKA RAO, ECONOMIST, DBS, SINGAPORE:

"Today's move was a follow-through of the hawkish September policy guidance as high and persistent inflation is seen as an impediment to the medium-term growth outlook. The new policy approach is a single-minded focus to contain inflationary expectations, with or without support from fiscal policy.

"This might carry short-term hurt to growth, but either way an accommodative monetary policy cannot spur recovery in isolation. On the other hand, however, risks that inflation might become generalised and entrenched are more material.

"With the cut in the MSF (Marginal Standing Facility) rate, the effective corridor now narrowed to 100 bps between the MSF and Repo rate....Going forward, there is still room for the other liquidity constraints to be unwound, but in a gradual and calibrated manner."

GANTI MURTHY, HEAD - FIXED INCOME AT IDBI ASSET MANAGEMENT CO. LTD, MUMBAI:

"The policy was on expected lines. The good thing is that the liquidity was increased by way of an increase in term repo limits, but another hike is still possible given that the policy stance is still hawkish -- not dovish at all. He has cut the growth rate expectation and raised the WPI estimate, we should expect more (interest rate) hikes in the future."

NIZAM IDRIS, STRATEGIST WITH MACQUARIE CAPITAL, SINGAPORE:

"The comments so far from RBI suggests still hawkish bias in monetary policy setting, which is likely to be good as the focus is on anchoring inflation to facilitate future growth framework. Also, efforts on reducing CAD (current account deficit) is bearing fruits."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI:

"I didn't find him (the RBI Governor) ultra-hawkish. However, the comfort with which he has brought back normalisation of monetary policy shows his increasing comfort on the external sector.

"Secondly, while the repo rate is going to be higher than what it was pre-May, he did say that he would be mindful of some of the growth concerns, which seems to suggest that there may not be sharp, severe hikes in repo. There would be a calibrated approach, although we do not rule out one repo rate hike of 25 basis points. If at all, the rate hike would be front loaded, likely to be in the next policy."

ARVIND CHARI, FIXED INCOME FUND MANAGER, QUANTUM ASSET MANAGEMENT, MUMBAI:

"RBI has continued and completed its calibration process with the Repo MSF difference now at 1%. The provision of another 0.5% on term repo would mean that along with Repo and standing liquidity facility, the overnight rate would cease to be at MSF but move between the Repo and the MSF (around 8.25%).

"It's a fairly neutral policy for long bond markets and further movements in yields should take cues from demand (and) supply. The overall guiding focus remains on inflation and one can't rule out another 25-50 bps hike till March next year -- if inflation remains sticky and if growth picks up."

SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI:

"The policy stance clearly reflects an inflationary concern while ensuring smooth liquidity measures in place to take care of the growth moderation. Today's policy tone indicates more of selective liquidity support measures while lowering the probability of repo ease in the subsequent meet.

"With higher inflationary pressure still intact, we expect the monetary policy to revolve around higher repo with smoother systemic liquidity. We believe the bond market has factored in the current phase of high repo-smooth liquidity and hence the yield curve is expected to remain range bound in the current quarter."