Economists, bankers predict 25 bps hike in policy rates by RBI

Economists are unanimous that the RBI has to continue its battle against inflation and expect another 25 bps hike in the repo rate on June 16.

If that happens, it will be the 10th consecutive hike since March, 2010. On May 3, RBI had gone in for a tough 50 bps hike in both the repo and reverse repo rates (to 7.25 and 6.25, respectively), but left the mandatory cash reserve requirement at 6 per cent.
"I expect a 25 basis points hike in the repo rate, because policy tightening has to continue till inflation is brought under control. But I don't expect the RBI to go in for a 50 bps hike as it had done on May 3," Ernst & Young India partner and national leader for global financial services, Ashvin Parekh, told PTI.

Pointing out that the last policy action did pay off in controlling demand, Parekh said, "Since inflation is still high, monetary tightening has to continue to prevent the economy from heating up again. Another 25 bps hike is more likely as liquidity position is comfortable and so is the call money market, which is also more or less stable now."
On the very low factory output data for April, Parekh said, "The IIP numbers were disappointing, but there is no room for worry, it only indicates a slowdown in growth. It is not really a bad thing, as the economy was heating up. More fiscal measures can help stabilise prices as well support growth."

Industrial output in April more than halved to a paltry 6.3 per cent, as against 13.3 per cent in the corresponding period of the previous year, due to a poor showing by the manufacturing and mining sectors.Significantly, auto sales, which have been high -- between 25 and 30 per cent-- for the past several months without a break, hit a two-year low of 7 percent in May.

However, the RBI measures are yet to see any clear impact on the inflation front; food inflation hit a two-month high for the week ended May 28 at 9.01 per cent.
The wholesale price based headline inflation stood at 8.66 per cent in April, a tad lower than 9.04 per cent in March. May core inflation number is expected on Tuesday, which according to some economists would guide the RBI in finalising its policy stance on Thursday.

However, majority of the economists PTI spoke with are of the opinion that May inflation numbers will be higher than April. The RBI's perceived comfort level is about 7 per cent, but consensus figure is 8.7 per cent for May.

"We expect RBI to increase the short-term lending rate by another 25 bps on June 16," Crisil chief economist,Dharmakriti Joshi, told PTI, as he considers inflation to be the major concern of the central bank. He also argued that though the April factory production numbers have been too low, RBI has to look into still rising inflationary expectation. "The inflation threat is real and it is only going to go up further," Joshi said.

On Crisil's inflation outlook for the first quarter, he said, if the diesel price is hiked it will be above 10 per cent and if not it will be around 9 per cent.

On the first quarter GDP numbers, he said, Crisil expects it to be hovering around 8 per cent. "Anyway the Q1 economic data will be weak and it will be sub-8 per cent," Joshi said, adding that overall growth for the full fiscal will also be under 8 per cent at 7.75-8 per cent. Fitch Rating's Devendra Kumar Pant says: "A 25 bps hike is pretty likely, but a lot will depend on the May inflation data. I think RBI will continue to monitor prices closely." He is of the opinion that RBI will effect more hikes during the year, to the tune of 50-75 bps, depending on the inflationary expectations.

On the inflation front, Pant says non-food inflation is the core and if it comes down, one can expect some breather from the Mint Street. But food inflation will remain high due to the recent MSP (minimum support price) hike and the increasing demand due to the rising income levels, he says.

"High food inflation is the new norm," Pant said, adding that past 6-7 years' average GDP growth of 8 per cent has resulted in over 15 per cent spike in national income levels.
Standard Chartered Bank India economist and head of research, Samiran Chakraborty, too foresees a 25 bps hike in the repo rate, as inflation remains the primary issue.
On the poor April IIP data, he said it is only a slowdown and not a collapse, hence nothing to worry about. He sees Q1 economic numbers to be under 8 per cent and May inflation at 8.5 per cent.

Axis Bank economist Saugata Bhattacharya too forecasts a 25 per cent spike, so does Yes Bank chief economist Shubhada Rao. Rao said the central bank had already indicated on May 3 that its medium term focus will be battening down inflation.

However, she sees no incremental threat to core inflation as commodity prices are more or less stabilised, though high. But she pegs inflation closer to 9 per cent till November.
On growth numbers, she said, "The April data only shows that growth is moderating and not collapsing."