Economists suggest further hike in repo rate to check inflation

MUMBAI: Economists have advised the Reserve Bank of India to increase the key repo rate in its mid-year monetary policy review later this month because of prevailing high inflation.

At a customary pre-policy meeting with the RBI Governor Raghuram Rajan on Friday, most market economists and analysts agreed the central bank should raise the repo rate - the rate at which banks borrow from the RBI - in the mid-term review on October 29.

The central bank had raised the repo rate by 25 basis points to 7.5% on September 20. But inflation based on wholesale price index, or WPI, rose more than expected by 6.5% in September due to higher food and core inflation. In August, WPI-based inflation had increased 6.1% and the RBI has indicated that its comfort zone is 6%.

"Though there is little that the central bank can do to rein in high food inflation, it can play a role in anchoring inflation expectation and avoid a spillover on the manufacturing inflation," said a forecasting firm's economist who attended the meeting. The country's industrial production moderated to 0.6% year on year in August from 2.8% in July.

Some economists also suggested that the central bank should reverse the marginal standing facility rate to reduce the spread between repo rate and MSF rate.

A majority of the economists at the meeting felt the country's current account deficit levels have improved and with the rupee strengthening against the US dollar, the external sector concerns have somewhat eased.

The rupee gained 11% from its lowest in early September and is now at around Rs 61 to a dollar.

Among the economists present at the meeting were Tushar Poddar of Goldman Sachs, Rohini Malkani of Citi, Sonal Varma of Nomura, Sajjid Chinoy of JP Morgan, Shubhada Rao of Yes Bank, Abheek Barua of HDFC Bank and SK Ghosh of State Bank of India.