Bankers see interest rate hike

Bankers see a stronger possibility of a rate hike by the Reserve Bank of India (RBI) in its January 2007 quarterly review following the high GDP growth in the second quarter of 2006-07.

The GDP grew at a higher-than-expected rate for the second quarter in a row, strengthening signals that the RBI will raise rates for the fourth time in a year to fight any likelihood of the economy overheating.

Anand Krishnamurthy, India Treasury and Capital Markets, said, "the possibility of a hike in rates has become a little stronger now, given the current scenario."

At close to 8 per cent, the consumer price index is much higher than the wholesale price index, which is at 5.30 per cent.

"There is also the unfinished job of the previous policy, in which only the repo rate was raised. The reverse repo rate is likely to be raised so that the 1 per cent band is maintained. Therefore, a quarter per cent increase in rates in the quarterly review is very likely," said Mohan Shenoy, group president, Kotak Mahindra Bank.

Finance Minister P Chidambaram talking about greater comfort if WPI dropped close to 4 per cent from 5.30 per cent earlier this month is seen as a sign of concern in the finance ministry over inflation and unexpected growth.

The news of GDP growing at a higher-than-expected rate in July-September 2006 also turned the government bond market a little nervous.

This led to bond prices falling by up to 20 paise and the yield on the benchmark 10-year bond rising by 3 basis points to 7.43 per cent.