Rate hikes likely to happen faster: C Rangarajan

The prime minister’s economic advisory council chairman C Rangarajan on Tuesday said “some monetary action to reduce the liquidity in the banking system will be appropriate.”

He was referring, of course, to food inflation, and despite it being a supply-side issue.

The street, however, feels the hikes will come faster now because of the rapid rise in industrial activity.

The Sensex took a cue and ended 104 points down despite blockbuster results from Infosys Technologies and the index of industrial production (IIP) data.

“The IIP numbers show that the economy is growing and cash reserve ratio (CRR) may be hiked anytime now by around 50 basis points. By the end of this fiscal, the reverse repo and repo rate may also be hiked by 25 basis points each,” said Yashika Singh, head of economic analysis at Dun & Bradstreet.

In November 2009, IIP grew at an annual rate of 11.7% compared with October’s 10.3%. The IIP stood at 2.5% in November 2008.
But Indranil Pan, chief economist at Kotak Mahindra Bank, feels a strong IIP alone will not trigger interestr rate hikes.

“There are other factors also that RBI will take into consideration,” he said.

He said segments such as consumer durables seems to have performed robustly and this could be mostly out of auto segment growth which was driven due to lower interest rates and stimulus effect of the Sixth Pay Commission payouts of October 2009.

Economists now await another key indicator: the monthly inflation data, which is scheduled to be released on Thursday.

“The data for December will be closely watched. We are expecting it to come at 7.4%,” said Anubhuti Sahay an economist with Standard Chartered Bank. She, too, forecasts a hike in rates by the RBI at the monetary policy review due on January 29.

“Overall, domestic demand is rising, as are inflationary pressures. We expect the rate tightening cycle to begin with the monetary policy meeting with an increase in both the CRR and policy rates,” said Sonal Varma, economist at Nomura Financial Advisory and Securities.

IIP, experts say, will continue to grow even in December, including due to base effect.

“We expect a double-digit growth in IIP even for December,” said Gaurav Kapur, senior economist  at ABN Amro Bank.

His bet on what the RBI will do? A 50 basis points hike in the CRR.