Banker crystal ball shows repo 25 bps higher
Bankers expect a hike of 25 basis points in the repo rate to 8% in the annual monetary policy of the RBI. Selecting best MF | Weekend Platter | In pics: World news & trends
By TNN |
NEW DELHI: Bankers expect a hike of 25 basis points in the repo rate to 8% in the annual monetary policy of the RBI. This is the short-term lending rate at which RBI injects liquidity into the system. The market is discounting a 25 basis point cut to 2% in the Fed funds rate next week.
Although wholesale prices-based inflation has gone up to 7.33% for the week ended April 12, bankers expect the rate to come down in subsequent weeks on account of the various measures taken by the government.
���The markets are discounting a 25-basis-point reduction in the Fed funds rate. Therefore, we expect the RBI to maintain its hawkish stance on account of inflationary pressures. A 25-basis-point hike in the repo rate will increase the corridor between the repo rate and 8% and the reverse repo rate at 6% to 200 basis points.��� a banker said.
Earlier, the RBI had indicated at measures to widen the spread between the rates at which it borrows from and lends to banks. This is aimed at giving the regulator more headroom to move either way, given the uncertainties in global markets.
Although wholesale prices-based inflation has gone up to 7.33% for the week ended April 12, bankers expect the rate to come down in subsequent weeks on account of the various measures taken by the government.
���The markets are discounting a 25-basis-point reduction in the Fed funds rate. Therefore, we expect the RBI to maintain its hawkish stance on account of inflationary pressures. A 25-basis-point hike in the repo rate will increase the corridor between the repo rate and 8% and the reverse repo rate at 6% to 200 basis points.��� a banker said.
Earlier, the RBI had indicated at measures to widen the spread between the rates at which it borrows from and lends to banks. This is aimed at giving the regulator more headroom to move either way, given the uncertainties in global markets.
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Currently, RBI borrows from banks at 6% through the reverse repo auction and it lends to banks at the rate of 7.75%. The margin can be widened by either increasing the repo rate or reducing the reverse repo rate. In situations where there are lesser uncertainties, it helps to have a smaller corridor between the repo and reverse repo rates and vice versa, RBI governor Y V Reddy has said.
���The RBI may not use all its options now, since already the CRR will take effect. I feel the RBI may not want to close that door now. It may not want to discourage the banks from lending already when the credit growth is slowing down,��� a banker said. India���s wholesale price index (WPI) inflation has surged sharply to 7.33% for the week ended April 12.
Bankers feel that the liquidity conditions will be comfortable despite the CRR effect which will drain out Rs 18,500 crore from the system and therefore expect a hike in the repo rate. The CRR hike of 50 basis points to 8% comes into effect tomorrow and but bankers expect comfortable liquidity conditions to continue.
With a staggered CRR hike in place, the policy may be muted analysts feel, since the RBI may not want to contribute to an economy that is already weakening, facing slacking foreign demand, and high inflation. They are of the view that rate hikes may not be very effective in lowering supply-side driven inflation.
With an impending rate cut by the US Federal Reserve, the interest rate differential with the US will widen further, which could attract strong capital inflows, leading to excessive rupee appreciation. Any sterilisation by RBI will lead to a build-up of excess domestic liquidity.
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