It may not even be 'pause' after this hike, say experts. Mr T.B.Kapali, Vice- President ( Economic Research), Shriram Group of Companies, responding in his personal capacity feels that this may not be the end of the story on higher interest rates.
He points out that the near 10 per cent fall in the rupee in the past two months is almost akin to a cut of 50 bps or more in interest rates. He said the large fall signifies that domestic aggregate demand is so strong that it is spilling over into imbalances in the forex market through imports.
He wondered if the current hike of 25 bps would be enough to offset the stimulatory effect of a large fall in the currency. He said, " The 25 bps hike in policy rates does not seem to be in consonance with the concerns expressed by the RBI itself about inflation and inflation expectations remaining high /strong. One gets the feeling that we are reacting to developments and not influencing them."
"To be sure, if the global risk situation turns for the better, one can see a large appreciation in the rupee as capital will begin flowing to emerging markets again," Mr Kapali added.
Mr Sudhakar Shanbhag, Chief Investment Officer, Kotak Mahindra Old Mutual Life Insurance Ltd, says: "The increase in repo rate by 25 bps each is largely in line with the market expectation, though the number of market participants expecting a pause had gone up post the macroeconomic report released. Though the RBI has chosen inflation control as its main focus at this point of time they have for the first time explicitly recognised the possibility of impact on growth and have indicated that if all data points are as expected then the need for a rate hike in December would be low. From a debt market perspective, the overhang of supply and probable slippages in the fiscal deficit numbers were in consideration as also growth moderation which can impact long-term interest rates. During this policy since the RBI has recognised the growth implications, the Government Securities market has reacted positively in spite of a rate hike."