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Get Ready For More Pain

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 expect more by way of rate hikes from the Reserve Bank of India (RBI).  Here's the dead giveaway.  "Monetary policy will, therefore, condition and contain perceptions of inflation in the range of 4-4.5 per cent". It is serious tough talking given the central bank has also revised its end-March inflation forecast upwards by a 100 basis points (bps) to 7 per cent. It is ominous. "The policy clearly indicates that inflation is the top priority and future policy action will also be based on the inflation trajectory. While this is aimed at cooling demand in the near-term and thereby controlling inflation, we must recognise that high growth and rising incomes in recent years have created strong demand momentum in the economy", says Chanda Kochhar, Managing Director & CEO of  ICICI Bank. "The policy rate change of 50 bps is much more than market expectation and contrary to a growing clamour for a pause in upward movement of policy rates. The general tone is quite hawkish and the trade off in favour of inflation control, sacrificing some growth is absolutely clear", says  K V S Manian, Group Head, Consumer Banking at  Kotak Mahindra Bank In recent times, there's been chatter the central bank had reached the last lap of its rate-hike cycle; the just effected one is the eleventh in a row. Both bankers and borrowers have cried hoarse that successive rate hikes had started to hurt. Data shows it has. Credit growth has tapered. The year-on-year credit growth slowed to 19.5 per cent on July 1, 2011 from 21.3 per cent at end-March 2011. That is marginally higher than the central bank's May 3 Policy statement of 19 per cent. Where are we headed? If you look at the past trends from July 2010 up till January 2011, the repo rate was hiked by 100 bps to 6.25 per cent from 5.25 per cent, but there was no significant change in bank's Base Rate (the rate below which they cannot lend) -- it remained at 7.5-8 per cent levels. "However, after the repo rate increases since January, there has been a one to one correspondence between the repo rate hike and base rate hike. Therefore, we expect another 50 bps increase in the Base Rate for banks", says Madan Sabnavis, chief economist at Care Ratings.  On the deposits side, banks hiked rates. This saw an increase in YoY deposit growth to 18.4 per cent in early July 2011 from 17.4 per cent YoY in early April 2011. This too, will put pressure on banks to hike interest rates. So what's the punt? It is higher rates in the economy will cool down demand for investment goods, consumer durables and mortgages. "Lower demand for these products should help to reduce pressure on supplies thus bringing down the core inflation number from the present level of 9.44 per cent", adds Sabnavis. And therefore, Kochhar's observation "we must recognise that high growth and rising incomes in recent years have created strong demand momentum in the economy", is ominous. The central banks cites the hike in the prices of petroleum products in May and June, and the increase in the minimum support prices  for rice and pulses to exert upward pressure on food inflation even if the harvest is good. It also says that while early corporate results for the first quarter indicate some moderation in margins that suggests reduced pricing power, the pass-through of higher commodity prices into more generalised inflation remains significant. The big unknown is oil. The price of the Indian crude basket rose to $114 per barrel on July 21, 2011. It had dipped to $110 per barrel in May from $118 per barrel in April. "Going by the recent trend, the price of oil could remain volatile as a consequence of the pace of global recovery, liquidity conditions and, importantly, the overall oil supply situation". Keep your fingers crossed. There will be more pain.