The market has already factored in a 25 basis points (bps) increase in key policy rates on Thursday, when the Reserve Bank of India (RBI) announces its mid-quarter review of the monetary policy.
But with interest rates already shooting through the roof, bankers expect RBI to press the pause button after that.
With inflation staying above RBI’s comfort zone, economists and bankers said it was likely to further tighten the policy. “We are expecting a 25 bps increase. The market is divided between a pause and a 25 bps increase. There are some people who feel the slowdown is acute enough to reassess the strategy of tightening monetary policy,” said Samiran Chakraborty, regional head of research, Standard Chartered Bank.
Driven by higher fruit prices, food inflation for the week ended May 28 was at a two-month high of 9.01 per cent. The figure was 8.06 per cent a week ago. The headline inflation, reflected in wholesale price index, rose 8.66 per cent in April. The government will release the May inflation number on Tuesday.
The expectation of a pause in the rate increase cycle is gathering steam as supply factors have been the main inflation drivers.
“Interestingly, at our investor conference, RBI Deputy Governor Subir Gokarn admitted that while the current drivers of inflation (food/commodity prices) were outside the purview of the monetary policy, RBI’s aim was to contain the pass-through of higher prices through demand management,” said Rohini Malkani, chief economist, South Asia, Citigroup Global Markets.
RBI has raised key policy rates eight times in 2010-11. It increased rates by another 50 bps in May this year to combat inflation. The country’s gross domestic product growth slipped to 7.8 per cent in January-March, the slowest in the last financial year, as high rates and input costs dragged down manufacturing sector growth to a 21-month low.
Growth in industrial output slowed to 6.3 per cent in April from a year ago under the new series, which takes 2004-05 as the base year. The index of industrial production grew 8.84 per cent in March.
“There could be a maximum 25 bps rate increase on Thursday. I think there will be a pause after that. Otherwise, growth may be seriously affected. Inflation is also expected to come down. A normal monsoon has been forecast, which will ease food prices,” said M Narendra, chairman and managing director, Indian Overseas Bank.
Bankers said while loans would become dearer if policy rates were increased, any further increase in deposit rates would happen with a lag.
“Deposit rates have already gone up. Margins are under pressure. There will be no other option but to increase lending rates,” said Ramnath Pradeep, chairman and managing director, Corporation Bank. He admitted this might slow credit growth.
Credit growth for the banking system was 22.3 per cent year-on-year for the fortnight ended May 20. Deposits grew 17.5 per cent in the period.
