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Economists split on rate hike, unanimous on hawkish RBI policy

	April 28, 2008

According to experts, the Reserve Bank, which is in an unenvious position, thanks to high inflation, is expected to take a tough stand in its monetary policy which will be unveiled on April 29. "Inflation continues to rise and the RBI will be hawkish but perhaps it can wait before taking any steps," said Shuchita Mehta, economist at Standard Chartered Bank.



Nine of the 17 economists surveyed by Reuters last week saw the RBI keeping its main policy rates on hold on April 29 but the outcome looked too close to call.



Talking to PTI last week, private sector Yes Bank’s chief economist, Shubhada Rao said, "The RBI will maintain a hawkish stance and there is a possibility of a 0.25 per cent increase in both the repo and reverse repo rates.”



The key short-term rates - repo and reverse repo - are used as instruments by the apex bank for liquidity management in the system. Presently, the repo rate stands at 7.75 per cent while the reverse repo rate, at 6 per cent. RBI would definitely target excess liquidity in the system, the experts asserted.



Though it had hiked the cash reserve ratio (CRR) limit only a few days ago by 0.5 per cent, the apex bank could still hike the reverse repo rate, felt Enam Securities' Chief Economist Sachichidanand Shukla.



"My view is that, the RBI might effect a 0.25 per cent hike in the reverse repo and leave the repo rate untouched. This is a softer option," he said.



Shukla reasoned that a repo rate hike might not impact inflation in the short-term, and, besides, it would affect economic growth which was already showing signs of a slowdown.



"If repo is hiked, then banks too might be forced to hike their interest rates," Shukla said.



Inflation is and will continue to be a major challenge, Rao said, adding, with global commodities and fuel prices remaining high, combined with inflation remaining above the 7 per cent level, "I expect a hawkish stance from the policy."



Crisil's Principal Economist and Director, D K Joshi, while agreeing on the hawkish tone part, felt the RBI might not tinker with the repo and reverse repo rates.



"A rate hike will not help in reducing inflation; on the other hand, it will affect economic growth," he said, adding with the 0.5 per cent CRR hike recently, there was no immediate need to hike key rates.



Wheat harvest is expected to be good and with normal monsoons forecast, inflationary expectations will get tamed in the next few months, he said.



However, global commodities and oil prices were high and with the oil price pass-through still incomplete, inflation would still need to be watched, Joshi said.



He pegged economic growth for this fiscal at 8.1 per cent.



"Growth should moderate to around the 8 per cent level but if interest rates are raised from hereon, then growth could fall below 8 per cent," warned Shukla.



The Government's fiscal and RBI's monetary initiatives would begin to make their impact felt with a lagged effect in some time, the economists said.



"Inflation should fall to the 6.5 per cent level by early to mid-June," said Bank of Baroda's Chief Economist, Dr Rupa Rege Nitsure. She too felt that the Reserve Bank might not touch the repo and reverse repo rates.



Most economists pegged the yearly inflation average above the Reserve Bank's comfort level of five per cent. "The yearly average should be around 5.5 per cent," both Joshi and Shukla said while Yes Bank's Rao pegged it much higher at around 6.4 per cent.