Fears of an uptick in inflation in coming months may push the Reserve Bank of India (RBI) to further hike the key repo rate – it is the rate, now at 7.5%, at which banks borrow from the RBI – today as part of its half-yearly / second quarter (July-September) monetary policy review.
Any such hike would be the second one in as many months, and would come in spite of easing concerns about rupee depreciation and current account deficit or CAD and worsening growth outlook.
The central bank has highlighted the possibility of inflation getting generalised through cost-push pressures in the second half of this fiscal. In its ‘Macroeconomic and Monetary Development Report’ (MMD Report) released on Monday, a precursor to today’s policy review, the RBI said that “the monetary policy faces an unenviable task of anchoring inflation expectations, even while growth remains tepid”.
A Prasanna, chief economist at ICICI Securities Primary Dealership, said “Even if the RBI hikes policy rate by 25 bps (in line with market expectations), the policy tone would be hawkish.”
The RBI said in the report that inflation was ruling above its comfort level and there were risks from both the wholesale price inflation as well as the consumer price inflation. The Professional Forecasters’ Survey conducted by the RBI indicated year-end inflation would be at 6%, up from 5.3% estimated three months ago.
Repo rate was increased by 25 bps on September 20 as a pre-emptive measure to anchor inflationary expectations.
Simultaneously, the marginal standing facility (MSF) rate was lowered by 75 bps to 9.5% to ease liquidity conditions against the backdrop of a stable rupee. This was followed by another cut in the MSF rate by 50 bps to 9% on October 7 aimed at normalising the corridor under the liquidity adjustment facility or LAF.
The MMD Report hinted at restoring the difference between the repo and MSF rate to 100 bps by yet another reduction of 25 bps today. There are chances the RBI may lift the cap on repo borrowing from current 0.5% of net demand and time liabilities of banks.
The Professional Forecasters’ Survey conducted by the RBI suggests growth at 4.8% this fiscal and 5.8% in 2014-15, slashed significantly downwards from earlier projections of 5.7% and 6.5% respectively. D K Pant, chief economist at India Ratings, the India arm of Fitch, said, “There will be some moderation in the RBI’s outlook on GDP growth for the current fiscal. However, it is difficult to say whether it would be revised to below 5% level.”
The MMD Report said that growth will likely recover only toward the end of this fiscal, driven mainly by good agricultural output, stronger exports and faster project clearances. Near-term growth is expected to remain sluggish. The RBI said that the forex swap window introduced on September 10 had attracted $11.3 billion via foreign currency non-resident deposits and banks’ overseas borrowing so far.