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RBI likely to raise repo rate by 0.25% to tame inflation


With food prices showing no signs of abatement, the Reserve Bank is likely to hike its key policy rate by 0.25 per cent
RBI Governor announces monetary policyNew Delhi: With food prices showing no signs of abatement, the Reserve Bank is likely to hike its key policy rate by 0.25 per cent tomorrow, the third straight increase under Governor Raghuram Rajan as part of the war against inflation.

Wholesale Price Index inflation in November climbed to a 14-month high of 7.52 per cent as prices of food items such as onions and potatoes surged. Consumer price inflation touched a nine-month high of 11.24 per cent last month.

Factory output shrank 1.8 per cent in October, the first contraction in the Index of Industrial Production (IIP) in four months.

“Crucially, core inflation as well as non-food manufacturing inflation rose marginally in November. As a result of rising price pressures, RBI is likely to raise the repo rate by 0.25 per cent to 8 per cent on December 18 in its monetary policy review, despite a still-shrinking industrial sector,” Crisil said.

Given the price rises at both the retail and wholesale levels, the RBI, with inflation control as its prime objective, is set to hike the repo rate once again later this week, it said.

Axis Bank chief economist Saugata Bhattacharya believes the probability of a 25 basis point rate hike is more, but “a 50 basis point rate hike is not off the table.”

However, Indian Overseas Bank Chairman and Managing Director M Narendra said the RBI could maintain status quo in its mid-quarter review if it perceives food inflation moderating in the coming days with improved foodgrain production.

RBI Governor Rajan, who delivered two repo rate hikes of 0.25 per cent each in as many policy reviews since he took over on September 4, had mentioned that he considered fighting inflation as the central bank’s “key responsibility.”

According to HSBC chief economist for India and Asean, Leif Lybecker Eskesen, while improved food supplies may help reduce food inflation in coming months, the sticky and high CPI headline and core inflation is testament to the strong underlying inflation pressures in the economy.

The RBI will likely deliver another 25 basis point rate hike in the upcoming policy review, he said.

Bank of America-Merrill Lynch concurred, saying a 0.25 per cent hike on December 18 is a “done deal” and adding that along with the hike, the RBI could also seal the shift of the money market to the repo mode from the marginal standing facility.

Highlights from Rajan’s press conference in Mumbai:

Following are the highlights of theRBI’s second quarter review of monetary policy 2013-14:

Repo or short-term lending rate up by 0.25% to 7.75%.

 Cash reserve ratio unchanged at 4%.

 Marginal standing facility (MSF) rate cut by 0.25% to 8.75%.

 Difference between repo and MSF rate narrows to 1%.

  Repo hiked due to upturn of inflation, other factors.

  Wholesale inflation expected to be higher than current levels; warrants ‘appropriate policy response’.

  Retail inflation to hover around 9%.

  Food price pressures may ease with the arrival of summer crop harvest and seasonal moderation.

 Prospect of delay in taper of US Fed Reserve’s bond purchases has brought calm to financial markets.

 Normalcy will restored in the forex market only when OMCs fully return to the market for their demand.

 FY14 GDP growth estimate revised downward to 5% vs 5.7%.

Growth likely to pick up in second half on good show in exports and agriculture.

Liquidity pressures building on small businesses as large entities holding on payments; remedies lie in speeding-up of Government and PSU payments.

  Average drawdown from MSF has declined to Rs. 0.4 trillion by mid-Oct, down from a high of Rs. 1.4 trillion in mid-September.

Final guidelines on unhedged forex exposures by corporates to be out by December.

Jalan panel on new bank licenses to hold 1st meet on Nov 1, decision of RBI on in-principle approvals will be final


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