Comment

Looks like Mint Road has taken umbrage at being called behind the curve.

Just as decibels started rising on Reserve Bank of India (RBI) inaction comes the move with the message: don’t take us for granted, we are worried about inflation, and we will hike rates as we go ahead.

Yet, Friday’s hike is insignificant both quantitatively and qualitatively — more bark than bite — and no way meant to tackle the inflation fears the central bank enumerates.

Actually, there is no bite.
For a repo rate hike to pinch, banks need to be big-time borrowers. In calendar 2010 so far, banks have borrowed only once at the repo window — that, too, a paltry Rs 400 crore on Friday. And since June 2009, the facility has been used on just four occasions (including Friday), with a total Rs 4,000 crore borrowed.

Such is the level of surplus in the banking system.
Sure, on Friday the Liquidity Adjustment Facility data showed a spare surplus of Rs 5,430 crore, but that’s because of advance tax outflows, which should come back into the system over the next couple of weeks.

And the reverse repo hike? Well, all it means is RBI will pay a quarter point more interest to banks for parking their surplus monies with it!

Interest rates edge up fast systemically only when demand for money overwhelms supply, but that’s an unlikely scenario for some time to come. Credit growth doesn’t have that kind of steam.
Sure, bond yields could pop 15-20 bps on Monday as an event reaction, but then, the market has already front-run the RBI (behind the curve!) and has factored in at least a percentage point rate hike through the year ahead.

Equities, too, can take a mild knock, but that should be it because this was always on the cards.

All the same, there is a moot point: these are early steps to put India into a higher-rate, higher-growth orbit. RBI will be hugely constructive if its future rates hikes are as — if not more — proactive, and always in small measures, so that the economy’s linear momentum is maintained.

A soft-rise, as it were.