Some analysts, traders & economists take a u-turn and call for just one more rate hike next week, a few say RBI could continue with the bias
For the first time in more than three years, economists, analysts and traders are at sixes and sevens on what the monetary policy stance should be. They are changing their stance so quick that few are sure as to what should be the direction. Some were calling for a pause in interest rate increase last month itself. But when it did not happen, they said RBI governor D Subbarao would not raise rates on October 25 at the half-yearly review. Now, there is a view he would not just stop with a raise next week, but could prolong it. Indeed, Subbarao himself had reversed his stance, of course, a year ahead of the rest when he indicated at a pause in November last, but soon shifted it. “While the view of the house is that RBI might pause for now, I think this will be the last rate hike and then a pause,” said Ramit Bhasin, MD-global markets at the Royal Bank of Scotland. Bhasin’s RBS is not alone in a confused state. Bond yields are now expected to rise to as high as 9.25%, indicating tougher macro economic environment as government overshoots borrowing targets. Benchmark 10-year Gsecs ended at 8.79% after rising to 8.82% during the day. Goldman Sachs, which termed last policy rate increase unnecessary, given the sharp slowdown in economic indicators, has now taken a u-turn. “We now think RBI may hike policy rates again on October 25, due to recent hawkish commentary coming from the central bank,” Goldman’s Tushar Poddar said in a report on Thursday. This is in contrast with what he believed just a week earlier. “The significant decline in domestic activity, the adverse global environment, falling asset prices and tightening financial conditions suggest to us that RBI will likely pause on October 25,” Goldman said on October 12. Policy makers and economists are clueless as to where the economy is headed. Inflation remains above 9% despite 12 rate increases, but the index of industrial production growth slumped to 4.1% in August, compared with a forecast of 4.7%. Motorcycle and tractor sales are surging with loans growing at an annual pace of 20% while sales of cars are forecast to grow at an anaemic 4-5%. ‘We revise our expectation. Inflation is still too high for the central bank’s comfort,” Sidhartha Sanyal, chief India economist at Barclays Capital, said recently. “RBI has made its stance and priorities explicit on the growth/inflation debate. Therefore, the continued weakness in industrial production is not likely to deter the central bank from another rate hike,” he said. With the macro-economic situation set to deteriorate, many fear yields may get volatile, unless RBI intervenes. “Any delay in the open market operations could further accentuate supply pressure, pushing the 10-year GoI sec yield beyond 9%,” Standard Chartered said in a recent report.
ET
