RBI may hike key rates: Economists

New Delhi:  With inflation showing no signs of moderation, economists expect the Reserve Bank to hike key policy rates by at least 25 basis points in its annual monetary policy to be unveiled on May 3. The headline inflation (WPI) stood at 8.98 per cent for March, much above the RBI's projection of 8 per cent, fuelling speculation that the central bank may go in for another hike in the repo (lending) and reverse repo (borrowing) rates.  "We are definitely expecting a rate hike. While we do see a 25 basis points (bps) hike in repo and reverse repo rates, it is also likely that the RBI could hike both rates by 50 bps each," Yes Bank Chief Economist Subhada Rao said.  Referring to 8.98 per cent inflation in March, she said: "These are very, very disturbing numbers. The sharp upward movement in core inflation is at 29-month high. For RBI this is going to be of great concern, as demand is extremely robust".  Expressing similar views, Crisil Chief Economist D K Joshi said, "We expect the RBI to hike repo and reverse repo rates by 25 bps each in its May policy review".  "Another hike of 25 bps in the next policy meeting is a certainty," opined Tushar Poddar, Chief India Economist at Goldman Sachs. The repo rate is 6.75 per cent and reverse repo is 5.75 per cent.  In order to check rising prices, the RBI has raised the key policy rates eight times since March 2010.  The rise in wholesale price inflation was mainly on account of increasing prices of manufactured items, milk, vegetables and fruits. The WPI stood at 8.31 per cent in February.  Besides, food inflation, which accounts for nearly 15 per cent of overall WPI inflation, touched the year-low level of 8.28 per cent for the week ended April 2 as prices of certain essential items like pulses and wheat declined, from 9.18 per cent in the previous week.  "Food inflation will not have much of a bearing on the RBI's decision making process. From a policy perspective non-food inflation is very critical and it is rising. Looks like inflation will remain high this year", Joshi said.  Right now, inflation is suppressed because the fuel price increases globally have not been passed on to Indian consumers yet. If they are transferred, inflation will be much higher than it is at present, Joshi added.  On an annual basis, fuel and power prices went up by 12.92 per cent, driven mainly by a 23.14 per cent rise in petrol prices and a 14.99 per cent jump in cooking gas (LPG) rates.

Enabling Inclusion - Aman Srivastava

Various studies have revealed that consumption is usually much less volatile than income, indicating a fair pattern of inter-temporal savings, even amongst the poorest households. But despite this active level of financial management, these households have no recourse to formal financial systems. Policymakers in India have recognised that improving current systems and designing new, innovative systems to reach the poor will require radical improvements in cost efficiency and an associated change in the existing set of regulations. The RBI has in recent years put in place several regulations to encourage financial inclusion by granting greater freedom to the concerned players while simultaneously seeking to protect the interests of the target populations. While many of its regulations have created an enabling environment for inclusion, some, understandably, have limited the progress that could have been made. This is an outcome of the ‘Regulator’s Dilemma’, a term coined by David Porteous: How can regulators balance their need to promote broader access to financial services with ensuring the stability of the financial system? This is a fine balancing act, failure to achieve it could lead to the choking of incipient attempts at providing universal access or financial destabilisation and the bankruptcy of the vulnerable. Ultimately, regulations have to be designed keeping in mind the risks involved. The risks will vary with the model adopted, whether the model is transformational or additive to banking. In addition, regulatory coordination will have to be achieved amongst the respective regulators to ensure they are not working at cross purposes. Since the current regulations touch upon the participatory capacities of players across all the concerned sectors, this discussion is segmented according to the regulations applicable to each sector. Which sectors are expected to play a leading role in expanding financial inclusion? Banks and mobile operators will be in the spotlight, along with any other companies that may partake in the business correspondent (BC) model. The chief regulators to walk the tightrope, then, are the RBI, TRAI and to a limited extent, the Competition Commission of India.  Several strides have been taken by the RBI in easing the regulatory environment to enable the entry and scaling up of participants. However, much more still needs to be done to ensure continued growth in this sector. For example, MSPs will have to provide inter-operable services by setting up some sort of clearing/settlement system, which will invariably involve the National Payment Corporation of India as a facilitator. Besides, banks will never have strong incentive to cater to poorer segments as long as their revenues come from floats and not from transactions.  While the RBI is currently marketing the FI paradigm through the bank-led model, it isn’t averse to giving centrestage to non-bank actors. Banks need to act quickly on the privileged position they currently enjoy.  Since financial inclusion through non-traditional modes is a new concept, and banking alliances with BCs a recent phenomenon, much is still to be learned over the coming years about customer protection issues, AML/CFT concerns, and the feasibility of various models. Regulations will have to keep evolving, and it shall be interesting to follow this evolution, which is already in motion and beginning to tangibly modify the financial landscape.

—The writer is an economist at the Centre for Financial Inclusion, Indicus Analytics. You can reach him at aman.srivastava@indicus.net