Money & Banking

As inflation bites, bankers expect RBI to hike repo rate

Beena Parmar Satyanarayan Iyer Mumbai | Updated on March 13, 2018

Raghuram Rajan, RBI Governor

The RBI may hike the policy rate by 25 basis points for the third time in as many months to quell a stubbornly high inflation. High foodgrain and vegetable prices have stoked inflation in November, which saw the wholesale price index-based inflation jumping to 7.52 per cent (from 7 per cent in October).

Additionally, the September inflation number was revised to 7.05 per cent from 6.46 per cent earlier.

“We expect a 25 bps hike in repo rate,” said V.R. Iyer, Chairperson and Managing Director, Bank of India. She said an immediate base rate hike was not on the cards.

A hike in the repo rate, the rate at which RBI lends to commercial banks, can lead to an increase in the cost of borrowings for banks.

In its mid-quarter monetary policy, along with a repo rate hike, experts also anticipate additional liquidity measures.

Soumya Kanti Ghosh, Chief Economic Advisor, State Bank of India, said, “The major thrust will be on repo rate in this policy. RBI has no other option but to hike the repo rate to anchor inflation expectations. With inflation expected to come down, banks may not raise base rates for now.”

October industrial production output released last week contracted 1.8 per cent year-on-year. This has further dampened confidence in the economy’s growth.

According to Shubhada Rao, Chief Economist at YES Bank, “The RBI will be compelled to raise the key rates by 25 basis points in the forthcoming monetary policy because of higher-than-comfortable WPI and CPI inflation.

“From the subsequent policy, the RBI will decide on the key rates based on the inflation momentum. However, weak economic growth means that the RBI will not have an unlimited room to hike key rates in future."

Different take

However, S.S. Mundra, Chairman and Managing Director of Bank of Baroda, expects the RBI to maintain status quo on repo rate as the last couple of hikes have not shown any impact.

According to him, any rate hike effect comes with a lag. “Also, there is huge liquidity in the system. Hence, the RBI may hike the CRR (cash reserve ratio) by 25 bps, though as a banker I may not like it,” Mundra said.

CRR is the slice of bank deposits parked with the RBI.

Whatever the RBI decides on Wednesday, it is clear that high inflation and subdued growth will force the RBI to maintain a hawkish policy stance till the New Year.


Published on December 16, 2013

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