RBI likely to hike key rates this week

After the Reserve Bank of India hiked key policy rates by 50 basis points in May, most analysts expect further tightening by the central bank when it reviews the monetary policy on June 16. While there’s a strong possibility of RBI hiking repo rates by 25 bps, it could also opt for status quo as growth and investment activity have decelerated. The bank is also grappling with rising inflation. A survey conducted by the RBI says households expect inflation to rise further by 40 and 120 basis points during the next quarter (11.9 per cent) and the following year (12.7 per cent) respectively, from the perceived current rate of 11.5 per cent. “Given the trend in the overall IIP growth numbers as per the new series and the prevailing inflationary pressures, we expect the RBI to continue with its rate tightening regime i.e. increasing the repo rate by another 25 basis points in the upcoming monetary policy review. Going forward, this would lead to a subdued growth in the consumption and investment demand in the near term,” said Arun Singh, Senior Economist, D&B India. The RBI survey said, “households’ expectations of general price rise were mainly influenced by movements in food prices. The percentage of respondents expecting price rise have gone down for all product groups (namely, general prices, food products, non-food, household durables, housing and services).” The Inflation Expectations Survey of Households conducted in the January–March 2011 quarter captures inflation expectations of 4,000 urban households across 12 cities for the next quarter (April-June) and for the next year (April 2011-March 2012). Ashutosh Datar, Economist, IIFL, said, “While growth is decelerating, it is still reasonably strong. And inflation remains unacceptably high… therefore we don’t expect the RBI’s stance on monetary policy to change significantly. Thus, May WPI data will set the stage for RBI’s policy decision on 16th June.” The IIP growth with new base, new components and weightings revealed a better than expected growth of 6.3 per cent compared to 4.2 per cent based on the old index, Singh said. “Food inflation is again inching up, adding to the core inflation pressures we have observed lately. The current expectation on monsoons is closer to 98 per cent normal. The degree of slowdown in growth would have implications on RBI’s rate increase plans,” said Sudhakar Shanbhag, Chief Investment Officer, Kotak Mahindra Old Mutual Life Insurance.  “Though, currently the bias is to control inflation, there would be a close watch on growth numbers as well since the tightening over the last 12 months will start showing impacts now and over the next few quarters.”

IE