Inflation: A 25 bps repo rate hike may be a given

The Reserve Bank of India (RBI) isn’t quite done with its rate war on inflation, the street appears to believe.

Bankers, fund managers, analysts, senior company officials and insurance company chiefs DNA spoke to expect the central bank to effect at least one more hike in the key policy rate in its monetary policy review on September 16.

Though some believe the RBI has already exceeded its ability to hike rates further and will pause, most others see one more rate hike in the offing.

The broad consensus is on a hike of 25 basis points (one basis point is a hundredth of a percentage point) in the repo rate, or the rate at which banks borrow from the RBI, taking it to 8.25% from 8% now.

Accordingly, the reverse repo rate, or the rate banks get on funds parked with the RBI, will also be hiked by 25 basis points to maintain the liquidity adjustment facility corridor of 100 basis points, the street believes.

The central bank had in its annual report this year said the high-inflation scenario warranted further rate hikes and also talked of tough times ahead. It had pegged gross domestic product growth at 8% for this fiscal.

Dwijendra Srivastav, head of fixed income, Sundaram Mutual believes no further hike is likely. “We believe the RBI will pause in this round and will look at the macroeconomic situation carefully. Just like in previous years, the central bank may want to pause a bit till November and then come back strongly with more rate hikes.”

I Unnikrishnan, managing director, Manappuram Finance also believes the RBI has no headroom left for further rate hikes, though he feels any further hike will not affect loan demand in a big way.

“Whenever the RBI has raised rates, we have managed to pass it on to our customers successfully. We don’t expect any further rate hikes,” Unnikrishnan said.

Wholesale price index based inflation for July came in at an annualised 9.22%, slightly below the 9.44% seen in June.