RBI may hike rates by 25 bps, feels India Inc

MUMBAI: The financial services sector and corporates expect the Reserve Bank of India (RBI) to hike key policy rates by 25 basis points — 1 bps is 0.01% — in its quarterly review early November. However, economists prefer playing it ‘safe’.

A survey by Royal Bank of Scotland (RBS) that covered 150 local market participants, including banks, insurance companies and mutual funds, showed that 75% of the respondents expect a rate hike of 0.25% in both its policy rates — the repo and the reverse repo — the rates at which the central bank lends and sucks excess liquidity in the system, respectively. But at the same time, a higher number of respondents (compared with its previous survey) at 11% expect a ‘neutral’ policy stance.

However, a section of the economists is more cautious on the central bank’s monetary policy stance. “Given trends in growth (3-month moving average industrial production at 8.8%) — credit and inflation— we maintain our view of the RBI hiking once or possibly twice by fiscal year end. This would take the repo rate to 6.5% and reverse repo rate to 5.5% from the current 6% and 5%, respectively.

However, global developments — imminent quantitative easing-II and recent measures by central banks the world over on tempering capital flows — could prompt a wait-and-watch stance in the upcoming November 2 policy,” said Citi’s economist Rohini Malkani in a note to clients.

Deepali Bhargava, economist at ING Vysya Bank, says, “We feel it’s going to be a close call on policy rate hikes in the forthcoming monetary policy. On the one hand, there’s worsening liquidity situation in the banking system, tentative signs of both inflation and growth moderation, surging capital inflows and high probability of Fed going in for a second round of qualitative easing on November 3 (a day after the RBI policy), which may make RBI go in for the wait-and-watch mode, hence pausing in the November policy.”

Even Nomura Securities’ economist Sonal Verma said at a media briefing earlier this week that there is a 30% probability of the central bank hiking policy rates in the November policy. Economists expect inflation to slow down as the base effect wanes.