The Hindu Business Line : Another hike in key policy rates on the cards

Hyderabad/Chennai, June 17 Bankers and economists are anticipating another hike in the key policy rates of the Reserve Bank of India. The RBI had hiked its repo rate (the rate at which it lends to banks or infuses liquidity) by 0.25 per cent to 8 per cent a fortnight ago.

The RBI has also earlier hiked the cash reserve ratio, or the amount that banks need to keep with RBI as interest free deposit, by half a percentage point to 8.25 per cent of their deposits.

Now, with worsening inflation figures that are expected to touch double digits during the next few weeks, almost everyone is keyed up for another round of rate hikes. But no one wants to bite the bullet just yet. They prefer to let the RBI lead with action.

“We are expecting another round of hike in repo/CRR/reverse repo by the RBI in view of the unabated inflation, which has crossed 8 per cent now. There is also talk of inflation touching double digits, by some experts. Some intervention by the central bank is almost likely in these circumstances,” Ms Renu Challu, Managing Director, State Bank of Hyderabad, said.

“The likely hike in rate, if it happens, will impact the credit off take”, she opined. “Already the housing loans sector and project finance are showing adverse impact, which will further intensify,” she added. SBH is adopting a wait and watch approach on interest rates. “We are not thinking of hiking our interest rates now as 0.25 per cent increase may not affect us much. We will wait for likely hike in future and take a call,” she said.

Dr K. Ramakrishnan, Chairman and Managing Director, Andhra Bank, concurred with that view. He said, “Liquidity is getting tighter. Credit growth is also picking up and I expect it will grow more during the next two to three months. The recent hikes will have an impact and call rates and other borrowing rates are bound to go up. We have to resort to these and other avenues to repay the high cost deposits that are maturing now. With inflation way above the RBI’s comfort zone of 5.5 per cent, they have very little choice. A CRR hike cannot be ruled out.”

Mr Tushar Poddar, Economist, Goldman Sachs, had said in a note, immediately after the last repo hike, that they expected a further 25 bps increase in repo rate in the next policy meeting on July 29 and also a further 50 bps increase in CRR in the remainder of 2008.

I-Sec’s Economist, Mr A. Prasanna said, in a note after the last hike that, “we do not rule out further rate action by RBI. In the near term, the RBI may limit itself to monitoring liquidity conditions. In the absence of capital flows, liquidity conditions are likely to remain tight into July as government cash balances start building up. However, should the loan waiver disbursal kick off in July itself, RBI may opt for a 25 bps hike in CRR in the policy review.”

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