More rate hikes ahead, says J P Morgan

HONG KONG: The Reserve Bank of India isn’t quite done with monetary tightening, and is likely to raise rates by an additional 0.25 percentage points in January 2007, says JP Morgan Chase economist Rajeev Malik.

Noting that the 0.25% hike in rates on Tuesday was widely expected, Malik said that although the central bank had opted to keep its WPI inflation forecast range of 5.0-5.5% for end-March 2007 unchanged, there were indications that actual inflation outcome would probably be above the official forecast range.

“Most likely, the RBI will revise the inflation forecast to 5.5%-6.0% at the October meeting when it will announce its mid-year review,” Malik said.

Stronger-than-expected industrial activity, still-elevated pace of credit expansion, and increased risk of higher inflation underscored the need for another rate hike. And recent trends in industrial production and bank lending suggest that monetary tightening so far “does not appear to have had a meaningful impact on industrial activity and the pace of credit expansion,” he noted.

Additionally, the pass-through of higher global oil prices in India remain incomplete owing to government subsidy, and poses a legitimate risk to the inflation outlook, especially in the light of India’s strong domestic demand-driven growth.

Malik felt that the text of the policy statement suggests a more measured response by the central bank, and almost rule out the possibility of another inter-meeting move.

“JP Morgan maintains that the RBI is not done with monetary tightening, but is likely to keep rates unchanged at the October 31 meeting and hike again (by 0.25%) in January 2007,” he added.