Economists expect more policy steps to tame inflation

Leading economists today said they expect a further tightening of the monetary stance by the RBI, following the manner in which it has declared a concerted war on the rising inflationary pressure in the economy.

In its first mid-quarterly review of the monetary policy, the Reserve Bank today increased  its key short-term lending (repo) rate by 25 basis points to 6% and borrowing (reverse repo) rate by 50 bps to 5%.
    
The move is guided by the central bank's urgency to contain headline inflation, which is currently at 8.5%, while the latest food inflation figure touched 15.10%. "Inflation remains the dominant concern in macroeconomic management...(there is a) need for continued policy response to contain inflation and anchor inflationary expectations," the central bank said in the mid-term review.

Reacting to the policy rate hikes, economists said, the bank will further hike rates in the second quarter review if the inflation remains at the current elevate levels. 

"The RBI move was more hawkish than we were expecting. More importantly, the tone is more hawkish. Given this, I expect another round of hikes in November," Yes Bank chief economist Shubhada Rao said.

Echoing similar views, Syndicate Bank executive director VK Nagar said though the hikes were on expected lines, he does not rule out anther hike in the way the inflationary pressure is building in the economy. "If inflation does not come down or at least remain at the current levels, then there will be another round of policy action by the apex bank," Nagar said.

Finance minister Pranab Mukherjee too, reacting to the RBI action, said the hikes are in the right direction as inflationary pressures are still there in the economy. 

"I think the RBI move is in the right direction because now the corridor (difference between repo and reverse repo rate is called the corridor) has been narrowed down and still inflationary pressure is there in the system," Mukherjee said in the capital.

"I think the adjustment of the repo and reverse repo rates will help mop up additional liquidity, which is putting pressure on the system," he added.

Fitch Ratings India director for International Public Finance Devendra Kumar Pant told PTI over phone from Delhi that," the stronger than expected hike sends out an impression that the RBI will go all-out to contain inflation. Moreover, the interest rates have to go back to the pre-crisis level. Today's move signals that repo rate will continue to go up and more aggressively if inflation is not cooling down."

According to Citi India economist Rohini Malkani, "given that inflation remains significantly above trends, we expect one or possibly two more hikes in the next six months. This should take repo and reverse repo rates to 6.5 and 5.5% respectively." She, however, added the next level of hike will be softer than the previous ones.

Care Ratings managing director and chief executive DR Dogra too sounded similar saying the RBI has taken an aggressive stance on inflation which should help bring down this number faster. "We can expect more such hikes in future if inflation does not come down."

Bank of Baroda chief economist Rupa Rege-Nitsure also said the hikes are in line with the expectations as RBI is concerned about the rising inflation. Similarly, IndusInd Bank chief financial officer SV Zaregaonkar said while the repo hike was on expected lines the reverse repo increase was a bit on the upper side.