Easing prices may put a stop to RBI rate hikes: Economists

MUMBAI: The easing of wholesale and consumer price pressures is yet to light the fire of interest rate reduction cycle hopes in India, but fears of a Paul Volcker-style era of tight monetary policy to fight inflation are beginning to fade. Almost all the 15 economists and traders polled by The Economic Times, except one, are sure there is little scope for further interest rate increases by governor Raghuram Rajan, but he may not et be in a hurry to lower rates to avoid repeating the mistakes of his predecessor.

His gamble of waiting for the inflation reading of December has paid off with consumer price gains coming in at a three-month low and wholesale price gains at a five-month low. " RBI has moved ahead of the curve by not increasing rates in December," said Ashutosh Khajuriah, president, treasury, Federal Bank.

But given the volatility of Indian food prices and a global economic recovery, it may be foolhardy to jump to the conclusion that the worst of the price rise is behind the country. "The rising oil prices and depreciation in rupee continue to remain a risk to inflation," said Rupa Rege-Nitsure, chief economist, Bank of Baroda.

The January 28 quarterly monetary policy may see Rajan holding the repo rate at 7.75%, but reiterating that he is determined to move to see savers realise positive returns on savings. For that to happen, prices have to ease substantially before the governor reduces interest rates.

"RBI will not do anything in this policy," said Jayesh Mehta, head, global markets, Bank of America. "We are hopeful that RBI will cut rates as headline inflation is coming down. RBI may take a call in the March policy."
Rajan surprised economists and investors on December 18 when he paused interest rate increases despite both consumer and wholesale prices climbing to a record. He now stands validated. With food prices cooling over the past few weeks and easing further in January, economists believe this month's reading could be even lower, hastening an interest rate reduction by April, instead of after elections.