Bankers expect 25 bps reverse repo hike

An overwhelming majority of bankers and fund managers expect the Reserve Bank of India to hike the short-term reverse repo rate by 25 basis points (bps) to 6 per cent.

The last time the central bank hiked its reverse repo rate was on June 8 and it was by 25 bps. The RBI sucks out excess liquidity from the banking system at the reverse repo rate. One basis point is one hundredth of a percentage point.

Of the 25 respondents that participated in the snap poll conducted today by Business Standard on the eve of the quarterly review of monetary policy, 15 were in favour of a rate hike while eight participants in the poll said 'no' to hike.

A strong majority of bond dealers and fund managers were in favour of a hike while practising bankers were vertically divided on the issue. Of the 25 polled, 16 were bankers of the general manger and above rank.

One-fifth of the respondents were in favour of a bank rate hike, in addition to a rise in the reverse repo rate. Bank rate is a medium-term signal on interest rates. It is now pegged at 6 per cent and, if there is a reverse repo rate hike of 25 bps, the reverse repo rate and bank rate will converge.

Sixteen respondents said 'no' to bank rate hike, while four of them did not express any opinion. On any change in banks' cash reserve ratio, 80 per cent of the respondents "� 20 out of 25 "� were in favour of status quo. One respondent each voted in favour of a rise and cut, while three respondents did not make any comment.

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TO HIKE OR NOT TO HIKE

Why YV Reddy should hike the interest rate

The RBI has been behind the yield curve. The 10-year benchmark yield had risen by about 75 basis points after a 25 basis points hike in rate in June.

The rupee pierced the 47 level last week. One way of protecting local currency could be rising rates.

Price of crude has gone up and this will fuel inflationary expectations.

The inflation rate is below 5 per cent now on account of the base effect; it will start going up in October.

Industrial activities are quite strong.

The credit offtake continues to be robust in Q1.

...and why the Governor should hike interest rate

US Fed has indicated a pause button in August. It may wait and watch before taking the next call.

Bank of Japan has ended the six year zero interest rate regime but does not seem to be in a hurry to hike rate again.

A large part of the government borrowing programme is yet to be finished.

Any rate hike will hurt the government the most.

The inflation rate is under control for the time being.

Any rate hike will derail the growth momentum. There was one hike in June.

What's the hurry for another hike in six weeks?

Reddy can always go for it in October or even earlier.