Economists bet on rate hike

Policymakers will not give much weightage to the industrial growth of 3.7% in January, particularly in a situation where the Wholesale Price Index (WPI) inflation continues to be a cause of concern, feel economists.

 “The IIP numbers for January, February and March are expected to be subdued because of the huge base effect.

We also know that there is some problem with the data itself. So, we really don’t think that the government, or the policymakers, especially the Reserve Bank of India (RBI), are going to take this too seriously,” said Sachchidanand Shukla, chief economist at Enam Securities.

The big worry for RBI is the WPI, which stood at a stubborn 8.23% in January, dropping just 20 basis points from December 2010.

“The growth in IIP was stronger than expected. We have seen a sequential improvement. But the IIP data is irrelevant. Policymakers are focused on inflation rather than growth. That is because inflation is considerably above the tolerance level,” said Abheek Barua, chief economist, HDFC Bank.

In the monetary policy review on Thursday, one more rate hike of 25 basis points each in key policy rates is in the offing, economists say.

“I am expecting three more hikes (including one on March 17) of 25 basis points each time in key policy rates because I feel inflation will still remain above 7.5% on an average next fiscal.

Therefore, we see the repo rate at 7.25% where RBI could probably stop,” said A Prasanna, economist, ICICI Securities Primary Dealership.

The repo rate and the reverse repo rate are currently at 6.50% and 5.50%, respectively.