Economists like HSBC's Leif Eskesen expect another rate hike by RBI

KOLKATA: Economists led by Citigroup’s Rohini Malkani and HSBC’s Leif Eskesen are betting on another interest rate increase by Reserve Bank of India ( RBI) governor Raghuram Rajan, revising their earlier forecast of a pause after the surprise revision in repo rate on Tuesday.

The banking regulator, determined as it is to turn real returns positive, may be left with no choice but to increase rates since inflation based on consumer price index (CPI) may not fall soon, they said.

While increasing repo rate by 25 basis points to 8% to counter the sticky retail inflation, the RBI had said that it wanted to bring down inflation to a low and stable level before allowing monetary policy to contribute to reviving consumption and investment demand.

“The RBI is aptly concerned about the much too high and sticky core inflation reading,” said Leif Eskesen, HSBC’s chief economist for India & ASEAN.

“While it indicated that rates would be on hold in the near term, we do not believe that this is the end of the tightening cy cle. Further tightening is needed, in our view, to bring core inflation firmly under control.”

The RBI had expressed concerns over inflation despite the significant food-driven decline in headline CPI and wholesale price index (WPI).

Citi’s Malkani said, “Going forward, we maintain our view that rates are likely to stay higher for longer and expect an extended pause through 2014. Given our expectations of CPI trending down from 9.9% to average 8.3% in 2014-15, all things equal — monsoons, fiscal consolidation and likely ‘unlocking’ food stocks — we expect rates to be on hold through 2014.”

The RBI felt the hardening of prices for services and some key intermediaries when viewed in conjunction with rising bank credit, increase in order books, pick-up in capacity utilisation and the decline in inventories relative to sales suggested that demand pressures were still exerting upward pressures on inflation.

“Even as our base case is for an extended pause, there is still chance of 25-50 basis points rate hikes if actual inflation deviates from the estimated trajectory,” Kotak Mahindra Bank’s chief economist Indranil Pan said.