At least 2 more rate hikes may come during the year, say economists

Mr Sudhakar Shanbhag , Chief Investment Officer, Kotak Mahindra Old Mutual Life Insurance Ltd, said: “The increase in repo rate by 25 bps each is largely in line with the market expectation. There has been an effective increase of 425 bps from a low of 3.25 per cent (reverse repo rate) in Q1 of CY10 to the current repo rate of 7.5 per cent (current operative rate).

From a debt market perspective, the overhang of supply and probable slippages in the fiscal deficit numbers are in consideration as also growth moderation which can impact long-term interest rates. If the fiscal deficit numbers can be managed around the budgeted level, it can give a surprise to the market. But, on the back of volatile commodity prices and under-provision of subsidies, the probability of this surprise is limited at this point of time. A one-time revenue bonanza like FY11 would be required for the same.’’

Dr Arun Singh , Senior Economist, Dun & Bradstreet India, said: “The RBI is expected to undertake another round of policy rate hikes before taking a pause. As a result, going ahead, we anticipate the economic activity, both the investment as well as the demand, to remain subdued.’’

Mr Abheek Barua , Chief Economist, HDFC Bank, said: “Pipeline pressures from input pass through, a likely diesel price hike and an increase in government controlled price of key food items is likely to take inflation to double-digits by June-August, 2011 and push average inflation for H1FY12 above the RBI’s forecast of 9 per cent. This is likely to drive the RBI to hike its repo rate by at least another 50 bps over the remainder of FY12 before it re-assesses the impact of past tightening measures and global headwinds to domestic growth."

Mr Rajrishi Singhal, Head, Policy and Research, Dhanlaxmi Bank said: “The policy tone indicates that RBI may come through with at least two more rate hikes of 25 bps each before pressing the pause button. This is evident from the central bank's guidance that it will persist with its anti-inflationary stance, especially since it feels that growth has not been adversely affected so far.’’

Ms Rohini Malkhani , Economist, Citigroup Global Markets (India), said: “Sticky trends in inflation, coupled with the RBI’s stance of bringing down inflation at the cost of growth, prompt us to maintain our view of a further 50 bps of tightening in 2011, taking the policy rate to 8 per cent by end-2011. Our forecasts factor in WPI at 8 per cent by March 12 (vs. the RBI’s estimate of 6 per cent). We reiterate that given consumption dynamics and the fact that 60 per cent of the rise in inflation is commodity led and beyond the RBI’s control, the need of the hour is a pick-up in investment cycle, and productivity enhancements particularly in food processing, warehousing.’’

Ms Deepali Bhargava , Economist, ING Vysya Bank, said: “We continue to expect an additional 50 bps hike in repo rate by RBI during the course of calendar 2011. Our preference is for a 25 bps hike in the July policy followed by another one of the same magnitude in the October one. This is when inflation begins to peak out and moderate for RBI to go in for a pause. The swap market doesn’t seem to be pricing in further rate hikes at this point. We recommend paying 1Y OIS. We target 8.6 per cent on the 10Y G-sec on a 6-month horizon.’’

COMMENT NOW