Economists call for pause in rate hikes in a pre-policy meeting with RBI

MUMBAI: Economists have called for a pause in rate hikes in a pre-policy meeting with the Reserve Bank of India amid concerns over a slowdown in the global economy and a possible spillover on the domestic economy.

“The general consensus among economists was that the Reserve Bank of India should pause on rate hikes in the backdrop of a global economic slowdown,” said an economist who attended the meeting. RBI has hiked key policy rate - the repo rate, or the rate at which it lends to banks against securities - for 12 times since March 2010 to rein in inflation expectations, which has remained above 9% for a long period now, much above the central bank’s comfort zone of 7%. Currently, the repo rate is at 8.25%.

Besides, the RBI has also expressed its concerns about the downside risks to growth forecast of 8% in FY12. Many global firms including Goldman Sachs, Morgan Stanley and Citi, and more recently ratings firm Crisil have scaled down their growth forecast for FY12.

“The worry this time is the economy which is slowing, with growth at sub-8% levels against 9% during 2008 and a limited ammunition against 2008 that Indian policy makers have in the event of a crisis. This is on both the fiscal and the monetary front,” said a note from Citi last week.

Goldman Sachs in a report after the mid-quarter review of policy in September had said in a note.

“Our assessment of the rate hike is that it was unnecessary, given the sharp deterioration in the global environment and a significant slowdown in domestic activity. We think that the inertia in policy-making, once the RBI is on a tightening cycle, is difficult to stop. And that was probably responsible for this hike. We believe the impact of this hike will be felt only after a 2-3 quarter lag, by which growth and inflation will have slowed considerably, and this may serve to exacerbate the downturn.”

The meeting was attended by NCAER director-general Suman Beri, Goldman Sachs economist Tushar Poddar, Citi Group economist Rohini Malkani and IDFC CEO Rajiv Lall, among others.