RBI is meeting on April 29 for crucial monetary policy review. Question uppermost on everybody's mind now is if the central bank will go ahead and hike further rates or will it not touch rates now as it does not want to risk growth. Industry expert AK Purwar and Sr Economist at ABN AMRO Bank Gaurav Kapur says the current situation warrants a repo and reverse repo rate hikes.
AK Purwar said the RBI needs to balance global and Indian differential interest rates and take into account the impact on investments if a hike comes into force.
Repo rate hike, Reverse repo rate hike or both
Purwar says the kind of inflation numbers which are there warrants an upward pressure on the interest rates. But it has to be very carefully balanced between the interest rates in India and prevailing rates globally. Most importantly, in the last three or more years, the interest rates to actual borrowers have almost gone up by 4%-5%. The kind of impact (a further interest rate hike) will have on investments, on project finances etc will also have to be factored in by the RBI before they can take a view. But definitely there is an upward pressure on the interest rates, he asserts.
While, Gaurav Kapur feels a 25 basis point hike in the repo rate is pretty much on the cards because the CRR hike is not enough to control inflation. "Inflation can spiral to even higher levels from here on as we get into June-September. It’s a seasonal pattern which plays out, so at this stage, a repo rate hike is warranted although it could have an adverse impact on growth. But to my mind I think, perhaps you need growth to slow down for inflation to come down because even after taking into account the supply side pressures, the demand side in certain industries is still quite strong." He also says there is a very low probability on the reverse repo rate hike as well.
On reaction from banks
Purwar says in case there is a repo rate hike, banks can push up their rates by 0.25% or 0.5%. "Some institutions may take the advantage of increasing it further, particularly on the discretionary loan side," he argues. However, if there is no outward pressure, there would not be much justification in raising the lending rates, he said.
On chance of RBI going for a rate hike later
Kapur says there is a possible scenario that the RBI will watch the commodity prices for a next couple of months before pulling the trigger. He says, " ...that will actually put in a lot of uncertainty in the market because at this point in time, you need the Central Bank to very clearly state what and how it wants to basically attack the problem of inflation." Hoever he thinks 29th meeting being annual policy meet, it would be better hike rates now than postpone it for later stage and see how the commodity prices move. "It's purely a timing issue; This is perhaps a better stage and a better time for the RBI to very clearly guide the participants in the market and the economy in general as to what to expect from interest rates, what is its assessment of the inflation, what does the Central Bank think of growth stc," he says.
Have markets factored in a repo rate hike?
Dhawal Dalal, Fund Manger, DSP Merrill Lynch, said the market has already factored in a repo rate hike. "Once it is been delivered, I will not be surprised to see a relief rally coming into the market."
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