Will he? Won’t he? All eyes are on Reserve Bank of India governor Y V Reddy on whether he will raise the central bank’s key reverse repo rate this month.
Will he? Won’t he? All eyes are on Reserve Bank of India governor Y V Reddy on whether he will raise the central bank’s key reverse repo rate this month.
Many agree it would just be a judgmental call for Reddy and his key team on Mint Street as factors for and against interest rate hikes at this juncture are in balance.
Reddy has raised the reverse repo rate by 125 basis points in five stages since October 2004, with the latest, and, the least expected one being on June 8.
Many ponder on whether rates would rise again within 47 days, when Reddy releases the April-June monetary policy review on July 25.
A Crisil MarketWire poll of 57 market players showed most expect RBI to hike the reverse repo by 25 basis points. Below are 10 top reasons why Reddy will or won’t hike interest rates:
Why he will
Strong industry, GDP growth shows demand-pressure on inflation is strong.
IIP growth broad-based, indicates previous hikes haven’t slowed industry.
Pressure from Congress, other parties to control inflation is growing.
Recent remarks show finance ministry’s pressure not to hike rates easing.
Inflation pressure on rising wages, construction, housing boom.
Credit, up 33% on year, still high; C-D ratio down only on deposit rise.
Japan hiked rates; US and Europe may tighten so in August.
US-India rate spread only 50 bps; needs to widen to lure investors.
Rates still accommodative, need to normalise to check inflation.
Rupee seen down sans rate hike on current account gap rise, FX flow fall.
Why he won’t
Raised rates just 39 days ago; will wait to analyse impact of that hike.
No macroeconomic changes have taken place since then for another hike.
Except US Fed, most central banks, ECB included, didn’t hike recently.
US is believed to be at fag end of its rate-raising cycle.
Inflation is below top-end of RBI’s 5.0-5.5% forecast for FY07-end.
Credit growth slowing. Apr-Jun credit rise 3.5% vs 10.3% sequentially.
Higher rates may stifle credit, choke investments, and economic growth.
Apr-Jun money supply growth was 2.1% compared with 4.8% year ago.
Markets just stabilised after June 8 hike. RBI may not add to volatility.
Banks suffered huge losses as gilt yields rose. More hikes to hurt.
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