Economists react to RBI's key rate hike by 25 bps

The Reserve Bank of India raised key interest rates on Thursday by a quarter point each, as expected, scrambling to contain inflation that has spread beyond food to fuel and manufacturing in Asia's third-largest economy.   The increase in key rates was the eighth since March last year. The repo rate, the short-term lending rate, was up 25 basis points at 6.75%. The reverse repo rate, the short-term borrowing rate, was hiked 25 basis points at 5.75%. The cash reserve ratio (CRR), the level of deposits that commercial banks must keep with the central bank, was unchanged at 6%. "This policy is very much on expected lines in terms of rate action, and no action on liquidity or SLR (statutory liquidity ratio). But the policy has now given more credence to domestic factors on inflation and so I expect the RBI to continue with its anti-inflationary stance and hike rates by another 25 basis points before it thinks of a pause. I don't expect bearishness in government bonds and swaps to materialise very heavily and markets will be mostly tracking liquidity and global developments," said Manish Wadhawan, director and head of rates trading, HSBC Mumbai. "The rate hike is basically on expected lines. The RBI has revised its inflationary expectations to 8% at March-end. So that is something that has influenced the rate hike decision. One or two more hikes cannot be ruled out (in 2011). It will depend on how inflation and the economy behave. RBI would not like to hurt growth," said KK Mital, head of portfolio management at globe capital, New Delhi "RBI is acknowledging the risks due to inflation and in turn a risk to growth. Its anti-inflationary stance will continue into the next quarter, and we expect it to hike rates further from hereon, said Rajat Rajgarhia director of research at Motilal Oswal Financial Services, in Mumbai "Today's hike was already priced in and despite external headwinds, which Today's hike might make other regional policymakers reconsider the pace of monetary tightening, RBI might not enjoy such luxury. We have penciled in +25bps hike every quarter, with risks that they could do more. Unfortunately monetary policy faces the complete burden of anchoring inflationary expectations and risks of generalization in price pressures seems more glaring than earlier," said Radhika Rao, economist, forecast PTE in Singapore "RBI is concerned about the international events and commodity prices. Inflation still remains a big challenge. I would expect RBI to hike rates by another 25 basis points at the next review," said Rakesh Rawal, head of private wealth management at Anand Rathi Financial Services, in Bangalore.