RBI likely to raise rates by 25 bps next week
A majority of economists expect the Reserve Bank of India (RBI) to raise key interest rates by 25 basis points in its quarterly review on July 27 and tighten policy further in coming quarters, a new Reuters poll showed.
While headline inflation has been in double-digits for five months running and economic growth is expected to reach 8.5% this year, tight liquidity and continued uncertainty about global recovery are expected to prevent the Reserve Bank of India (RBI) from tightening policy more aggressively.
The RBI has raised rates three times this year by 25 basis points each, most recently in an unexpected move on July 2.
“My sense is unless we see a strong pick up in domestic demand both for credit, investment and for the economic activity in general, we might see a little bit of a softer approach towards policy tightening than initially thought,” said Saugata Bhattacharya, an economist with Axis Bank in Mumbai.
Most economists have not changed their expectations from a Reuters poll on July 5 that the RBI would raise the repo rate, at which it lends to banks, by another 50 basis points to 6% by end of December.
They expect the RBI to raise the reverse repo rate, at which it absorbs excess cash from the banking system, by 50 basis points by end-December.
Tight liquidity since early June has led economists to expect no change in the cash reserve ratio (CRR), the percentage of cash banks must keep in reserve with the RBI by end-December, compared with a 50 basis point rise expected in the July 5 poll.
Of 12 economists in the new survey who were also part of the previous poll, two have lowered their expectations on rate increases for the rest of the year, while three expect the RBI to tighten more aggressively than earlier forecast.
Twelve economists said the RBI’s policy tightening in recent quarters was appropriate, while four said the RBI should tighten more aggressively.
Most economists polled expect the repo rate to remain the RBI’s operative rate by the end of September, a sign that they expect tight cash conditions to persist. The RBI has allowed cash conditions to remain tight in recent weeks, which helps dampen inflation expectations.
Economists were almost evenly split on whether the repo or reverse repo would be the operative rate by the end of December.
Repo:
Seventeen of 20 economists expect the RBI to raise the repo rate in the July 27 policy review by a quarter-point to 5.75%. By the end of December, 10 economists expect a total of 50 basis points in increases in the repo rate and five expect 75 basis points of increase.
Source:- Money control
