The Reserve Bank of India raised its key lending rate by .25 percentage point this morning, which took the repurchase rate to 7.5%, in line with expectations. That pushed the borrowing rate, which is pegged to the repo rate, to 6.5%. Here’s a look at what analysts had to say about the move, which came as India’s monthly headline inflation stood at 9.06%.
The RBI is on the right course
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The Reserve Bank of India raised rates on Thursday for the 10th time since March 2010.
“The RBI had no other option but to maintain its anti-inflationary stance and raise its key policy rates,” said Veena Mishra, chief economist for the Mahindra Group of companies. “I do not think it expects inflation to come down in the near future as result. Rather, the aim is to contain inflationary expectations, and hence, the prices that we see perhaps 8 months to a year out from today. That is, in my view, the correct stance.”
Ms. Mishra also attributed the recent slowdown in growth from January through March to a failure to carry out policy reforms rather than to monetary tightening. “Without further policy reforms, a stable ‘high growth-low inflation’ trajectory just will not materialize,” she said.
Low growth is okay (for a bit)
“An economic downturn is exactly what India requires to temper its underlying inflation problems,” said Credit-Suisse’s Robert Prior-Wandesforde, head of economics for China and Southeast Asia, as he pondered the relative importance of India’s two priorities—bringing down inflation and mainintaing a high GDP growth rate. “At this stage the RBI’s number one priority must be to break the wage-price spiral.”
Too much weight to global commodity prices?
Many of the drivers of inflation are coming from prices in imports, notably crude oil, and this is beyond the Indian central bank’s control, said Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance Company Ltd, who worried that a possible slowdown in other parts of the world and could also hurt India. Mr. Srivastava worries that the central bank is “burning a forest to tame the tiger.”
“In this macroeconomic backdrop even a small rate hike of 25 bps is too hawkish and may turn out to be counterproductive,” he wrote in a note. “RBI has to choose between ‘sacrificing growth’ and ‘killing growth’ for inflation now and hence it should wait & watch more domestic and global data before taking further actions.”
Mr. Prior-Wandesforde, of Credit Suisse, also noted that India’s headline inflation index, which the RBI appears to be watching carefully, is “largely determined by international commodity price developments.”
And K.V.S. Manian, head of consumer banking at India’s Kotak Mahindra Bank, said that, “given the global commodity prices, there may be a new normal to the inflation and it may not entirely be controllable by monetary policy.”
At least another .50
Religare Capital Markets Ltd. revised down its estimate for peak inflation for India for the current fiscal year from 11% to 10.5%, but kept its estimate for average inflation over the year at 8%. Expect more interest rate increases, said the firm. “Concerns over inflation outweigh concerns over moderating growth now,” wrote Jay Shankar, chief economist, in a note. “The need for a coordinated real fiscal tightening is necessary to make the growth process more inclusive and sustainable. We believe we have 50bps more of rate hike before the policy makers hit the pause button.”
Abheek Barua, chief economist for India’s HDFC Bank, seconded that. “Pipeline pressures from input pass through, a likely diesel price hike and an increase in government-controlled price of key food items is likely to take inflation to double-digits by June-August, 2011, and push average inflation for H1FY12 above the RBI’s forecast of 9%,” wrote Mr. Barua in a note. “This is likely to drive the RBI to hike its repo rate by at least another 50 bps over the remainder of FY12 before it re-assesses the impact of past tightening measures and global headwinds to domestic growth.”
Via: India Real Time