MUMBAI (Reuters) – The Reserve Bank of India (RBI) raised key interest rates on Tuesday by a quarter point each, as expected, in a bid to clamp down on resurgent inflation and warned that higher food prices could become entrenched if steps to boost output are not taken.
The increase in key rates was the seventh since March, and while the 25 basis point rises were expected, a growing number of analysts had said in recent days that a 50 basis point increase was needed.
KEY POINTS:
- Repo rate, the short-term lending rate, up 25 basis points at 6.50 percent.
- Reverse repo rate, the short-term borrowing rate, up 25 basis points at 5.50 percent.
- Cash reserve ratio, the level of deposits that commercial banks must keep with the RBI, unchanged at 6.0 percent.
COMMENTARY:
JONATHAN CAVENAGH, SENIOR FX STRATEGIST, INSTITUTIONAL FX SALES, ASIA AT WESTPAC INSTITUTIONAL BANK, SINGAPORE:
"India has a serious inflation problem, something officials have been highlighting recently. I suspect the market would have been looking for a bolder move in terms of a 50 basis points move.
"They need to show the market that they are prepared to get ahead of the curve but a 50 basis points move may have prompted fears of a pullback in growth, so we only got a 25 basis points move."
GAURAV KAPUR, SENIOR ECONOMIST, ROYAL BANK OF SCOTLAND, MUMBAI:
"RBI policy rate hike was along the expected lines. It is an attempt from the central bank to contain the impact of recent spurt in food inflation into more generalized inflationary pressures.
"Considering that demand conditions remain fairly strong, we expect the Indian central bank to raise rates by another 50 bps at least in the first half of 2011 itself.
"The RBI has also hinted at slower growth with rising risks of high food inflation, widening current account deficit and the constraints from high fiscal deficit."
SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI, MUMBAI:
"Clearly, the RBI stance indicates that there are more tightening on the way. And our sense is that in the current financial year we will see another 25 basis points hike, and perhaps in the first quarter of FY12 another 25.
"So we are basically talking about by the middle of the year the repo rate will be at 7 percent and the reverse repo rate at 6 percent.
"But our sense is that further monetary monetary tightening beyond that will depend on how the growth pans out and our sense is that there is a possibility that RBI will pause for certain time after repo rate reaches 7 percent."
VIVEK RAJPAL, INTEREST RATE STRATEGIST, NOMURA FINANCIAL ADVISORY & SECURITIES (INDIA), MUMBAI:
"Following today's rate hike we should see some steeping of the OIS curve. Going ahead, the RBI will continue with the gradual tightening process. This is because the effective tightening of monetary situation has been far higher than the actual policy rate hike."
"For instance, even before today's policy release the MIBOR (Mumbai interbank offered rate) fixing was around 6.70 percent, around 45 basis points higher than the repo rate (RBI's key lending rate).
"So expecting a 50 basis point hike was anyway too much and what central banks have learnt in 2007/08 episode is that it is far better not to be aggressive on rate hikes in a commodity price rise driven inflation."
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:
"Today's move clearly shows that the RBI has relaunched its attack on inflation given the persistence of inflationary pressures.
"I expect them to frontload the rate hikes in the January-March quarter as in the next financial year there will be limited room because of the expected large sized government borrowing programme.
"There are lots of uncertainties on the fiscal front and the foreign institutional investors front but I am expecting another 25 basis points increase in the next mid-quarter review as well."
ASHUTOSH DATAR, ECONOMIST AT BROKERAGE IIFL, MUMBAI:
"We expect a 25 basis points hike in the March policy meeting and a cumulative 100 basis points hike in policy rates in calendar 2011.
"Monetary policy tightening along with sustained high inflation will result in domestic demand momentum moderating a bit in FY12, which will create the much needed slack in the economy for inflation to moderate.
"We expect GDP growth of 7.7 percent in FY12, slower than 8.6 percent in FY11."
AMBAREESH BALIGA, VICE-PRESIDENT OF KARVY STOCK BROKING, MUMBAI:
"The rate hike decision is in line with our expectations. But looking at their revised inflation projections and the RBI report that came in yesterday, we can expect another 25 basis point hike in some time."
JAGANNADHAM THUNUGUNTLA, HEAD OF RESEARCH, SMC GLOBAL SECURITIES, NEW DELHI: "I think 50 basis points hike would have helped better to attack the inflation problem. Inflation has been a concern and it's on top of their mind, but probably they want to raise the rates in two steps."
DEVEN CHOKSEY, MANAGING DIRECTOR AT K R CHOKSEY SHARES & SECURITIES IN MUMBAI:
"The RBI is trying to stem inflationary pressure, but at the same time is being cautious that growth is not impacted. They are following a gradual approach for rate hikes, so that pressure is not felt suddenly.
"The market is relieved, and seems to be taking a positive view of this approach. I am expecting the market to stabilise, not just from this, but also because the dollar remains weak.
"Working capital costs for companies will go up, but I guess they will have to offset this with higher volumes and efficiency."
MEGHNA PATEL, ECONOMIST, STCI PRIMARY DEALER, MUMBAI:
"Actual inflation may be higher than RBI's revised estimate. So a lot depends upon how food prices pan out in the next few weeks. We could still have another 25 basis points hike in March.
"Market should prepare for the issue of a new 10-year benchmark bond around the start of next financial year with a coupon of 8.00-8.25 percent."
MARKET REACTION
- The 30-share BSE index extended rise after the decision to be up 0.9 percent.
- The yield on the most traded 8.13 percent, 2022 bond fell to 8.23 percent from 8.24 percent before the policy decision.
- The benchmark 10-year bond yield fell to 8.16 percent from 8.18 percent.
- The one-year swap eased 2 basis points to 7.40 percent.
- The benchmark five-year swap was down 2 basis points at 8.01 percent.
- The partially convertible rupee trimmed gains to be at 45.53 per dollar, from 45.48 beforehand.
BACKGROUND:
- India's food inflation eased for the second straight week in January, tracking lower fruit and vegetable prices. The food price index rose 15.52 percent and the fuel price index climbed 11.53 percent in the year to Jan. 8.
- The wholesale price index , the most widely watched gauge of prices in India, rose 8.43 percent in December from a year earlier, compared with 7.48 percent in November, showing food inflation had fed into the broader economy.
- India's manufacturing sector expanded at a slower pace in December than in the previous month, weighed down by a weakening growth in factory output and new orders, a survey showed earlier this month.
- Growth in India's service sector also eased in December from a four-month high the previous month, reflecting a slightly slower expansion in new business.
- India's annual industrial output in November grew at 2.7 percent, its slowest in 18 months.
- India's infrastructure sector output grew 2.3 percent in November from a year earlier, slower than an upwardly revised annual growth of 8.6 percent in October.
(Compiled by Swati Bhat, Neha D'Silva, Ami Shah, Sumeet Chatterjee, Prashant Mehra and Aditya Phatak; Editing by Ranjit Gangadharan)
The increase in key rates was the seventh since March, and while the 25 basis point rises were expected, a growing number of analysts had said in recent days that a 50 basis point increase was needed.
KEY POINTS:
- Repo rate, the short-term lending rate, up 25 basis points at 6.50 percent.
- Reverse repo rate, the short-term borrowing rate, up 25 basis points at 5.50 percent.
- Cash reserve ratio, the level of deposits that commercial banks must keep with the RBI, unchanged at 6.0 percent.
COMMENTARY:
JONATHAN CAVENAGH, SENIOR FX STRATEGIST, INSTITUTIONAL FX SALES, ASIA AT WESTPAC INSTITUTIONAL BANK, SINGAPORE:
"India has a serious inflation problem, something officials have been highlighting recently. I suspect the market would have been looking for a bolder move in terms of a 50 basis points move.
"They need to show the market that they are prepared to get ahead of the curve but a 50 basis points move may have prompted fears of a pullback in growth, so we only got a 25 basis points move."
GAURAV KAPUR, SENIOR ECONOMIST, ROYAL BANK OF SCOTLAND, MUMBAI:
"RBI policy rate hike was along the expected lines. It is an attempt from the central bank to contain the impact of recent spurt in food inflation into more generalized inflationary pressures.
"Considering that demand conditions remain fairly strong, we expect the Indian central bank to raise rates by another 50 bps at least in the first half of 2011 itself.
"The RBI has also hinted at slower growth with rising risks of high food inflation, widening current account deficit and the constraints from high fiscal deficit."
SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI, MUMBAI:
"Clearly, the RBI stance indicates that there are more tightening on the way. And our sense is that in the current financial year we will see another 25 basis points hike, and perhaps in the first quarter of FY12 another 25.
"So we are basically talking about by the middle of the year the repo rate will be at 7 percent and the reverse repo rate at 6 percent.
"But our sense is that further monetary monetary tightening beyond that will depend on how the growth pans out and our sense is that there is a possibility that RBI will pause for certain time after repo rate reaches 7 percent."
VIVEK RAJPAL, INTEREST RATE STRATEGIST, NOMURA FINANCIAL ADVISORY & SECURITIES (INDIA), MUMBAI:
"Following today's rate hike we should see some steeping of the OIS curve. Going ahead, the RBI will continue with the gradual tightening process. This is because the effective tightening of monetary situation has been far higher than the actual policy rate hike."
"For instance, even before today's policy release the MIBOR (Mumbai interbank offered rate) fixing was around 6.70 percent, around 45 basis points higher than the repo rate (RBI's key lending rate).
"So expecting a 50 basis point hike was anyway too much and what central banks have learnt in 2007/08 episode is that it is far better not to be aggressive on rate hikes in a commodity price rise driven inflation."
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:
"Today's move clearly shows that the RBI has relaunched its attack on inflation given the persistence of inflationary pressures.
"I expect them to frontload the rate hikes in the January-March quarter as in the next financial year there will be limited room because of the expected large sized government borrowing programme.
"There are lots of uncertainties on the fiscal front and the foreign institutional investors front but I am expecting another 25 basis points increase in the next mid-quarter review as well."
ASHUTOSH DATAR, ECONOMIST AT BROKERAGE IIFL, MUMBAI:
"We expect a 25 basis points hike in the March policy meeting and a cumulative 100 basis points hike in policy rates in calendar 2011.
"Monetary policy tightening along with sustained high inflation will result in domestic demand momentum moderating a bit in FY12, which will create the much needed slack in the economy for inflation to moderate.
"We expect GDP growth of 7.7 percent in FY12, slower than 8.6 percent in FY11."
AMBAREESH BALIGA, VICE-PRESIDENT OF KARVY STOCK BROKING, MUMBAI:
"The rate hike decision is in line with our expectations. But looking at their revised inflation projections and the RBI report that came in yesterday, we can expect another 25 basis point hike in some time."
JAGANNADHAM THUNUGUNTLA, HEAD OF RESEARCH, SMC GLOBAL SECURITIES, NEW DELHI: "I think 50 basis points hike would have helped better to attack the inflation problem. Inflation has been a concern and it's on top of their mind, but probably they want to raise the rates in two steps."
DEVEN CHOKSEY, MANAGING DIRECTOR AT K R CHOKSEY SHARES & SECURITIES IN MUMBAI:
"The RBI is trying to stem inflationary pressure, but at the same time is being cautious that growth is not impacted. They are following a gradual approach for rate hikes, so that pressure is not felt suddenly.
"The market is relieved, and seems to be taking a positive view of this approach. I am expecting the market to stabilise, not just from this, but also because the dollar remains weak.
"Working capital costs for companies will go up, but I guess they will have to offset this with higher volumes and efficiency."
MEGHNA PATEL, ECONOMIST, STCI PRIMARY DEALER, MUMBAI:
"Actual inflation may be higher than RBI's revised estimate. So a lot depends upon how food prices pan out in the next few weeks. We could still have another 25 basis points hike in March.
"Market should prepare for the issue of a new 10-year benchmark bond around the start of next financial year with a coupon of 8.00-8.25 percent."
MARKET REACTION
- The 30-share BSE index extended rise after the decision to be up 0.9 percent.
- The yield on the most traded 8.13 percent, 2022 bond fell to 8.23 percent from 8.24 percent before the policy decision.
- The benchmark 10-year bond yield fell to 8.16 percent from 8.18 percent.
- The one-year swap eased 2 basis points to 7.40 percent.
- The benchmark five-year swap was down 2 basis points at 8.01 percent.
- The partially convertible rupee trimmed gains to be at 45.53 per dollar, from 45.48 beforehand.
BACKGROUND:
- India's food inflation eased for the second straight week in January, tracking lower fruit and vegetable prices. The food price index rose 15.52 percent and the fuel price index climbed 11.53 percent in the year to Jan. 8.
- The wholesale price index , the most widely watched gauge of prices in India, rose 8.43 percent in December from a year earlier, compared with 7.48 percent in November, showing food inflation had fed into the broader economy.
- India's manufacturing sector expanded at a slower pace in December than in the previous month, weighed down by a weakening growth in factory output and new orders, a survey showed earlier this month.
- Growth in India's service sector also eased in December from a four-month high the previous month, reflecting a slightly slower expansion in new business.
- India's annual industrial output in November grew at 2.7 percent, its slowest in 18 months.
- India's infrastructure sector output grew 2.3 percent in November from a year earlier, slower than an upwardly revised annual growth of 8.6 percent in October.
(Compiled by Swati Bhat, Neha D'Silva, Ami Shah, Sumeet Chatterjee, Prashant Mehra and Aditya Phatak; Editing by Ranjit Gangadharan)
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