The Hindu Business Line : Hike in reverse repo rates likely: Dealers

A major section of the money market is expecting a 25-basis-point hike in the reverse repo in the monetary policy review to be announced on Tuesday, given the rise in oil prices and a possible rise in inflation rates.

According to a senior official with a State-run bank, the market sentiment is bearish and it is likely that the Reserve Bank of India may hike the reverse repo rate.

"The oil prices, which show no indication of coming below the current levels, are putting pressure on inflation. The US Fed Reserve too has indicated that it will hike rates by about 75 basis points this year. Under these circumstances, I feel the RBI may hike the rates," said the official.

Mr Bhaskar Ghose, Managing Director and CEO, IndusInd Bank, also agreed that a rate hike seemed likely. He pointed out that the market had already factored in the rate hike, with the yields on the 10-year benchmark moving higher from 6.85 to 7.17 per cent.

"I would look for a 25-basis-point hike in the reverse repo rate, which is in line with RBI's stated preference for price stability ahead of interest rate stability. It would assure appropriate liquidity even while meeting legitimate credit requirements," he said.

However, a rate hike now would not be in the interest of the economy considering that a rise in credit offtake was expected, said a primary dealer. A hike in the reverse repo is likely to put pressure on banks' margins.

"Inflation— though it has come down now— is because of the base effect and not because of manufacturing or food prices. If oil prices continue to rise, inflation is bound to increase by end-September or October," he said.

A small section, however, said that the RBI may just indicate the possibility of a hike and may see the hike through in October 2005, as it is carrying only a monetary review. "The RBI had announced a 25-basis-point hike in reverse repo in the Credit Policy in April 2005, when the market was least expecting it.

This time while the market has already factored it in, it is likely that the RBI may leave it untouched," said another dealer. The market has ruled out the possibility of a change in the bank rate.

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