RBI set to hike rates despite Japan crisis

MUMBAI: Events in Japan are expected to weigh on the mind of Reserve Bank of India governor D Subbarao while charting the course of action in his mid-term policy review on Thursday. However, the majority bet continues to be on a 25 basis point hike in policy rates.

Fears that the quake would push Japan, the world’s third largest economy, further into recession resulted in oil prices dipping more than $4 per barrel to $97.4 on Monday. Besides, the reaction of world capital markets and the impact on capital flows and trade as also inflation are expected to be taken into account by the central bank governor.

According to Frederic Neumann, co-head of HSBC’s Asia Economic Research, many Asian countries are expected to tighten policy rates in coming months. “However, financial market volatility could delay these moves well into the second half, if not further. The risk then would be that officials would need to deliver an even more forceful punch to compensate for the current hold up and bottle up rising inflation expectations”.

However, bond dealers and bankers are betting on an 25 basis point hike in policy rates. “I expect RBI to increase the repo and reverse repo rate by 25 basis points since inflation is a major concern” said Ashish Vaidya, head of forex, interest rates, currency and commodities trading at UBS India.

“I do not think a 25 basis point hike in the repo rate would push up lending rates. The market has already factored in this increase and this is being reflected in short term rates,” said Keki Mistry, vice-chairman and CEO Housing Development Finance Corporation.

Economists, too, are betting on a rate hike. “Looking ahead, given the structural element in high food prices, as well as upside risks arising due to oil, we expect inflation to come in the 7-7 .5% range with an upward bias through 2011. We maintain our view that the RBI will hike by an additional 50 bps in 2011, with a 25bps hike likely in its review this Thursday, and a further 50 bps in 2012,” said Rohini Malkani, economist, Citi India.

Tushar Poddar, Chief India Economist, Goldman Sachs said that RBI is expected to hike policy rates by 25 bp in the March 17, meeting. “Beyond that, we believe the RBI will hike policy rates by another 50 bp in calendar year 2011,” he said.