BW Communities

The Plot’s Changed

Business World Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[You can finally heave a sigh of relief. The Reserve Bank of India (RBI) has said it is done with the rate hike cycle. The RBI did hike the repo rate by 25 basis points (bps) to 8.50 per cent and reverse repo rate to 7.50 per cent -- maintaining the 100 bps corridor between the two key rates. But that's in the headlines. It also said: "The likelihood of a rate action in the December mid-quarter review is relatively low. Beyond that, if the inflation trajectory conforms to projections, further rate hikes may not be warranted". Says Tushar Poddar of Goldman Sachs: "We think the data on inflation would have to surprise significantly to the upside for the RBI to change its stance. It (RBI) could have chosen the option to not be so explicit about a stop to rate hikes, but by so doing, we think it has enhanced its credibility, and dispelled uncertainty about rates and anchored future expectations. We continue to think that with inflation and growth likely to surprise on the downside, the RBI will likely cut interest rates in April 2012, and we have built in 100 bps in rate cuts in the next fiscal year". The year-on-year headline inflation has remained stubbornly high during the financial year so far, averaging 9.6 per cent. It was driven by all the three major groups:  primary articles; fuel and power; and manufactured products. Both the level and persistence of inflation remain a cause of concern. "However, there is some comfort coming from de-seasonalised sequential quarterly WPI data which suggest that inflation momentum has turned down", said the RBI. Headline inflation has stayed above 9 per cent for the past 19 months, while CPI-based inflation has been higher than 8 per cent for the past 38 months.  Inflation pressures have become persistent in the last few years. In the past 66 months (since April 2006), it stood above 5 per cent in 48 months; above 6 per cent in 44 months; above 7 per cent in 34 months; and above 8 per cent in 28 months.  The last rate hike cycle (in 2008) saw the repo rate peak at 9 per cent, as inflation stayed above 7 per cent for about 9 months. In the current cycle, however, inflation has been much more stubborn, inviting today's rate hike. The central bank began exiting from the crisis driven expansionary policy in October 2009. Since then, it raised the cash reserve ratio (CRR) by 100 basis points, and raised the policy rate (the repo rate) 12 times by 350 basis points. The effective tightening has been of 500 basis points as liquidity in the system transited from surplus to deficit. This is shown by the by the daily borrowings under the liquidity adjustment facility (LAF) repos – it averaged around Rs 47,000 crore till October 21, 2011. But this deficit remained within one per cent of banks' net demand and time liabilities (or deposits) the comfort zone assessed by the central bank.