Economists and analysts offered a range of reactions to the RBI's hike of its repo rate to 8.25 per cent. Some felt that a 50 basis point hike would have sent a stronger message to the market. Others thought that the 0.25 per cent hike was on expected lines and the market would not be surprised by it. Given a number of conflicting cues - high inflation, slowing economy, volatile IIP numbers, high credit growth, - experts felt that the RBI had chosen to take the middle path.

Mr Moses Harding, Head-Global Markets Group, IndusInd Bank, said this 0.25 per cent hike will keep the market guessing on the next move to induce price volatility in all asset classes. This stance will keep 364-day T-bill yield around 8.35-8.50 per cent and 10-year bond yield at 8.25-8.35 per cent without clarity on the break-out direction.

'Banks unlikely to pass on rate hike'

Mr T.B. Kapali, Vice-President, Economic Research, Shriram Group of Companies,Chennai, said, "After the two 50 bps hikes in May and July, another 50 bps hike would have sent a very powerful message on inflation control. Perhaps, the RBI possibly feels that global commodities prices could cool noticeably as the US and Euro zone situations look messy.

Indeed, one cannot rule out a good downward correction in crude oil in the next 3 to 6 months based purely on demand situation in the US / Euro zone. A lot also depends on prospective actions by global central banks led by the Fed – If it does more Quantiative Easing, expect commodities to go up again (further)."

Asked about the impact of petrol price increase on inflation, Mr Kapali said, "Its impact on inflation is exaggerated – petrol is an item of final consumption and, therefore, price increases will result in adjustments in overall consumption expenditure and not in final prices. Diesel is however a different story – commercial vehicles (trucking), industry and agriculture together account for 70 per cent of total diesel consumption. Therefore, diesel price increases will feed into input costs and get passed on if demand remains robust.

Asked if banks would pass on the hikes to their customers, Mr Kapali said, "CRR still remains untouched. Therefore, the possibility of the repo rate hike getting passed on by banks is to that extent weakened. But, credit growth appears to be quite robust and liquidity also under continuous deficit. This should theoretically call for deposit rate increases. On balance, I feel this rate hike may not get passed on."

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 500 bps from a low of 3.25 per cent (reverse repo rate) in Q1 of CY10 to the current repo rate of 8.25% (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."

RBI actions have slowed GDP, bank credit growth

Mr Munish Dayal, Partner (Financial Services), Baring Private Equity Partners India's, says, "RBI monetary actions have succeeded in slowing growth of GDP to about 7.5 per cent and bank credit below 18 per cent. The combined effect of high interest rates, policy paralysis and global uncertainties has crashed growth of corporate capital expenditure to a mere 5 per cent. Inflation still remains stubborn at 9.8 per cent and will need structural intervention on the supply side to be brought down, rupee has depreciated 6-7 per cent, which will further increased the import bill for petrol and diesel."

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