RBI expected to hike CRR, Repo rate

The Reserve Bank is likely to surprise the market by tightening money supply to combat inflation, which would push up interest rates, according to a study by financial services giant Barclays.

"We believe the central bank’s policy (in India) objective will be to contain inflation, and that it will tolerate sub-trend growth if necessary... We expect the RBI to continue withdrawing liquidity via cash reserve requirement hikes of at least 25-50 basis points within the next few months," Barclays said in its emerging market research.

The study also expects ‘possibly more hikes’ in CRR in the second half of this year. Besides, it expects the RBI to follow through with a repo rate hike of 25-50 basis points in the next one to two quarters.

Cash Reserve Ratio (CRR) is the requirements for banks to keep a proportion of its deposits with central bank and repo is the rate at which RBI injects liquidity in the system by buying government securities.

The Reserve Bank has already announced 0.75 per cent hike in CRR to suck out around Rs 27,000 crore from the system to cool down inflation.

A few other studies on inflation by reputed names like IMF, NCAER and Crisil were also put out.

An IMF study puts weekly inflation rate in India at an annualised rate of 3.4 per cent, much below official estimates of eight per cent and caste doubts over the efficacy of current methodology of calculating year-on-year inflation.

Economic think tank NCAER expects that international food prices are unlikely to fall in the immediate future owning to low tradable stocks and lag in supplies of farm produce.

Rating agency CRISIL cautioned the government against using price control measures to soften inflation, saying they would distort resource allocation and create shortages.

The RBI’s belief, according to the Barclays study, is that regardless of whether inflation is supply side driven or not, the endgame is a situation where excess demand pressures are prevalent.

"In addition, we believe the central bank’s perception is that supply-side shocks from oil, food and base metals are not temporary and will persist," it said.

The RBI would utilise the various instruments it has at its disposal to withdraw liquidity and guide market interest rates higher, the study said.

An IMF study, When will inflation subside, said the traditional year-on-year data are contaminated by base effects. As such, it is much better to use week-on-week or month-on-month data.

If this calculation methodology...