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RBI Seen Raising Repo Rate Again In July

BW Online Bureau 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[The Reserve Bank of India (RBI) is expected to raise its key policy rate by a further 25 basis points next week after inflation quickened in June and may hike once more by the end of the year, before pausing its long tightening campaign, a new Reuters poll shows. Expectations that the repo rate will peak at 8 percent by end-2011 are largely unchanged from a previous forecast in mid-June, and hinge largely on whether persistently strong price pressures in Asia's third-largest economy will soon begin to abate. India's wholesale price inflation quickened in June to an annual 9.44 per cent from 9.06 per cent in May, driven by higher prices for manufactured goods and fuel, even as the economy showed signs of cooling. Of the 23 analysts polled, 11 respondents expect the repo rate to rise by a total of 50 basis points (bps) by the end of the year, peaking at 8 percent. Nine of the respondents expect the Reserve Bank of India to pause its rate hike cycle after raising the repo rate to 7.75 percent in July. Only 4 expected the RBI to take a break in September and raise rates again by December. "We should start seeing signs of inflation stabilising in the next 2-3 months because there will be a lagged impact of the global commodity price correction," said Sonal Verma, a Mumbai-based economist at Nomura who expected the RBI to pause after a 25 bps rise next week. "And of course the slowdown we are seeing in India will also have some positive impact," she said. The RBI projects inflation will moderate to 6 per cent by end-March 2012. It said in May that it expected inflation to cool down after September, adding to analysts' expectations that the policy tightening cycle will end this year. The RBI has raised rates 10 times since March 2010 as it battles stubborn price pressures, including a quarter-point increase last month, ranking it among the most aggressive central banks in the world. Still, India's most widely watched inflation reading has remained elevated and well above the RBI's comfort zone of 4.0-4.5 percent since the beginning of the year, cementing the need for more monetary tightening despite signs of a slowdown in the economy. India's industrial output rose at its weakest pace in nine months in May, the latest sign that growth was cooling. While the most likely scenario is for the RBI to raise rates by another 50 bps before hitting the pause button, two analysts expected the RBI to raise rates by another 75 to 100 basis points by June. "Local fundamentals - still elevated inflation amidst some signs of growth moderation - validates the case for further rate hike by the RBI," said Anubhuti Sahay, economist at Standard Chartered Bank. "However, global uncertainties need to be watched out closely as a significant deterioration therein can force a reassessment of monetary policy response," she said. Another Reuters poll last week showed that analysts have scaled down their growth expectations and raised inflation forecasts for the Indian economy, compared with their outlook just 10 weeks ago. The median estimate of more than 20 economists for 2011/12 growth eased to 7.9 percent from 8.3 percent in the previous poll in May. Their inflation forecast is now at 8.5 percent for 2011/12 from 7.7 percent in the previous poll. Still, they expected rates to peak at 8 percent by end-2011, noting that more than a year of tightening was already crimping investment and consumption. (Reuters)