Repo rate raised 25 bps as central bank continues inflation firefight.
The Reserve Bank of India (RBI) on Thursday raised policy rates for the 10th time in 15 months, extending the longest streak of monetary tightening in a decade.
While the latest 25 basis points increase in key policy rates was on expected lines, RBI Governor D Subbarao has made it amply clear that the central bank is in no mood to press the pause button on rate rises anytime soon — something India Inc and the rest were hoping for.
In its mid-quarter review of the monetary policy, RBI increased the repurchase rate, the rate at which it lends to banks, to 7.50 per cent. The reverse repo rate has automatically adjusted to 6.5 per cent from 6.25 per cent. The central bank said domestic inflation risks remain high and it is willing to risk a short-run slowdown in growth to curb price pressures.
Most economists expected the rate hike cycle to stretch as inflation is likely to go up. HDFC Bank chief economist Abheek Barua expected another 50 basis points rise by RBI during the current financial year. Citigroup India economist Rohini Malkani also expects the same quantum of hike, taking the repo rate to 8 per cent by December this year.
| FACT BOX |
| REPO RATE HIKED to 7.5%. As a result, reverse repo rate and MSF go up to 6.5% and 8.5%, respectively |
| RBI ON A HAT-TRICK: In May, the repo rate was hiked 50 bps. If another hike takes place on July 26, this will be the first time in RBI’s history that key policy rates would be hiked for three consecutive months |
“Pipeline pressures from input pass-through, a likely diesel price hike and an increase in government-controlled price of key food items is likely to take inflation to double digits by June-August, and push average inflation for the first half of FY12 above the RBI’s forecast of 9 per cent,” Barua said.
Bankers were not willing to commit whether there would be an immediate increase in lending rates, but said it may be inevitable shortly. ICICI Bank Managing Director & CEO Chanda Kochhar said the RBI decision and the prevailing systemic liquidity conditions could increase cost of funds, and lending rates.
RBI said there was no evidence of any sharp or broad-based slowdown, though some deceleration in an interest rate-sensitive sector like automobiles has been evident. Corporate earnings and profit margins in the fourth quarter were in line with the previous three quarters’ performance and despite rise in input costs, pricing power of India Inc remained intact, the central bank said.
While Finance Minister Pranab Mukherjee praised RBI for its “timely move”, industry was disappointed. Industry chamber Ficci said economic growth would contract. The Confederation of Indian Industry said it was time the government looked at fiscal policy as well to maintain a balance between growth and inflation. Ashok Leyland’s Chief Financial Officer K Sridharan said this would push the “customer to a point where he will refuse to purchase”.
RBI’s inflation focus is clear. “Domestically, inflation persists at uncomfortable levels. Moreover, the headline numbers understate the pressures because fuel prices have yet to reflect global crude oil prices. On the growth front, even as signs of moderation are visible in some sectors, broad indicators of activity — 2010-11 fourth quarter profit growth and margins and credit growth do not suggest a sharp or broad-based deceleration,” the central bank said.
