Latest hike no end to tightening cycle

Economists see the RBI going in for further monetary tightening in the coming months and contend that the latest increase in repo rate does not constitute the end to the tightening cycle.

With inflation expectations deep in double digit territory, further monetary tightening still looks more likely than not, according to Richard Iley, Chief Asia Economist, BNP Paribas. “We target at least one further 25 basis repo rate hike perhaps as early as the next policy review, which will now take place on April 1”, he said in a research note post the RBI monetary policy review.

Bringing inflation to 6 per cent in two years will require further tightening, according to Leif Eskesen, HSBC’s Chief Economist for India and ASEAN.

“We have therefore pencilled in at least another 25 basis point in rate hike between now and summer, even if the RBI switches to monitoring mode for now”, said a HSBC’s post policy note.

The RBI rolled up its sleeves again and raised the policy rate further to get inflation under control. This was the right decision, but it does not constitute the end to the tightening cycle, according to Eskesen. “If RBI wants to knock out core inflation, the policy rate will likely have to be hiked further” One cannot rule out the possibility of further rate hikes this year, said Anis Chakravarty, Senior Director, Deloitte in India. “I expect the next to happen in the first quarter of 2014-15. Overall, the latest move from RBI seems to be based on a long term consumer price index driven strategy targeted at retail inflation. The fallout is likely to be prevailing higher rates during the coming fiscal year”, Chakravarty told Business Line.

(This article was published on January 28, 2014)
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