RATE HIKE SEASON JUST GOT LONGER

The message from the country’s central bank is loud and clear: Expect a series of policy rate increases through the next financial year, as inflationary pressures have accentuated, even as risks to growth are emerging.  In its mid-quarter monetary policy review today, the Reserve Bank of India (RBI) increased key policy rates by a quarter point – the eighth increase in ayear – warning that rising oil prices will put more pressure on the already high inflation. This was on expected lines. The repo rate – RBI’s short-term lending rate – has gone up from 6.5 per cent to 6.75 per cent with immediate effect. The reverse repo rate – its short-term borrowing rate – has risen from 5.5 per cent to 5.75 per cent. But what worried the markets was the hawkish tone adopted by RBI while raising its wholesale price inflation forecast for the year to 8 per cent, a full percentage point higher than the number in the third quarter review in January. RBI said rising global commodity prices, particularly of oil, were a major contributor to inflationary pressures. Domestic fuel prices, which were yet to fully adjust to the global prices, might put further pressure on inflation, it said.  “Based on the current and evolving growth and inflation scenario, RBI is likely to persist with the current antiinflationary stance,” the central bank said.  RBI clearly articulated the risks to growth from high inflation. “The continuing uncertainty about energy and commodity prices may vitiate the investment climate, posing a threat to the current growth trajectory,” it said.  Financial sector pundits are thus no longer debating whether there will further rate rises. Their discussions centre on how much. “RBI’s stance clearly makes a case for frontloading rate hikes to cool inflation. RBI is likely to squeeze in more rate hikes in the first half of the next financial year.