End of rate hike cycle likely in September: Experts

All talks of the Reserve Bank of India ending the rate hike cycle came to a standstill on July 26, when the bank hiked key policy rates by 50 basis points as against the consensus expectation of 25 basis points. Going forward, analysts expect the regulator to extend its current rate hike series by another 25 bps as inflation continues to scale up at least till August. However, the regulator is widely expected to take a pause afterwards with the country's growth momentum increasingly showing signs of moderation. "Inflation will likely peak in August to about 10%," a research report of Kaushik Das, an economist from Deutsche Bank, stated. "It would then moderate gradually to 8% by December and further to 7% by end of March 2012, provided monsoon turns out to be normal and global commodity prices remain stable at current levels. Given the RBI's tone, we believe that unless external risks (primarily stemming from US and Euro area debt crises) manifest in a disorderly manner, the RBI will find itself compelled to raise rates again in September by 25bps," he explained. The RBI raised the repo rate (8%) and reverse repo (7%) rate by 50bps in its first quarter monetary policy on July 26. Repo is the rate at which banks borrowing money from the RBI while they park their excess liquidity through reverse repo window. Since April, 2010, the regulator hiked its key rates by 325 bps in a bid to contain high price rises. "Despite its hawkish stance, the RBI is nearing an end to its hiking of rates," said Sonal Varma and Aman Mohunta from Nomura Research in a note. "We attach a 60% probability to another 25bps repo rate hike in September, followed by a pause. We believe the RBI’s aggressive rate action reflects both a need to front-load its rate hikes due to lags in policy transmission and a recognition that rate hikes could become politically more difficult as the growth slowdown broadens." Though the RBI governor expressed satisfaction over policy transmission, there were many banks, which did not fully pass on the higher cost of borrowings to their customers. In the aftermath of RBI’s recent hikes, however banks across the board are hiking their lending rates. "So, what will be the impact of repeated rates hike on the growth?" ask many who are apprehensive of slower pace of growth at the cost of taming inflation. "Economic growth set for a moderation in FY12 to 7.9%–we expect the effect of growth moderation to be amplified in the second half due to statistical base effect elevated level of inflation to provide downside risk to growth," said Shubhada M Rao and her team of economists at Yes Bank . They expect monetary tightening to continue by another 25 bps till September. In the first quarter credit policy, the RBI governor, however, did not sound overly cautious on growth moderation as he felt "growth moderation still in early stage".

Moneycontrol