Signals pause after 25 bps repo rate hike.
The Reserve Bank of India on Tuesday raised interest rates once again — the 13th time in the past 20 months — but finally gave the good news the markets had been waiting for. RBI gave a strong signal it may be finished with the tightening cycle as growth slowed.
While increasing the policy lending rate, the repo rate, by 25 basis points to 8.5 per cent in line with expectations, RBI said the likelihood of a rate move at the December review was “relatively low”. “Beyond that, if the inflation trajectory conforms to projections, further rate hikes may not be warranted,” the central bank added.
There was good news on the inflation front as well. The central bank said it expected the headline inflation rate to ease from December on the back of softening demand and global commodity prices. India’s inflation, measured by the Wholesale Price Index (WPI), has been hovering around the double-digit mark for 20 months.
* Repo rate raised 25 bps to 8.5%
* Reverse repo at 7.5%
* Cash reserve ratio unchanged at 6%
* Prepayment penalty on home loans to be removed
* GDP forecast lowered to 7.6% for FY12 from 8%
* Pause in policy hinted; may not increase rate further
Growth, according to RBI, is clearly moderating on account of the cumulative impact of past monetary policy actions as well as some other factors. “As inflation begins to decline, the opportunity emerges for the policy stance to give due consideration for growth risks, within the overall objective of maintaining a low and stable inflation environment,” the central bank said. It also revised down its growth forecast for the fiscal year to 7.6 per cent from eight per cent with a downward bias earlier, while sticking with its forecast that headline WPI inflation would ease to seven per cent at the end of the financial year.
Market players and other stakeholders were happy with the prospect the long rate hike season may finally be coming to an end. The main stock exchange indices ended up 1.9 per cent to their highest close in over two and a half months though banking stocks fell as much as 3.1 per cent after RBI deregulated the savings bank deposit rates.
While economists said there was a clear direction the central bank was not looking at any more rate increases, bankers said they may not raise interest rates further. “Lending rates will go up only if deposit rates go up. As of now, we have a good flow of deposits. Margins were also healthy as was evident in the second-quarter earnings announced by some of the banks,” said Pratip Chaudhuri, chairman, State Bank of India.
India Inc was happy despite Tuesday’s 25 basis points rate hike. While there was some immediate concern over Tuesday’s hike, Confederation of Indian Industries president B Muthuraman said it was a huge relief that RBI had finally acknowledged the impact that monetary tightening was having on growth. “Given the current inflation dynamics, the 25 basis points hike in the policy rate was in line with expectations. However, what comes as a relief is the clear hint in the central bank’s statement that further rate hikes are not warranted if the inflation trajectory conforms to projections.”
Apex chamber Ficci said it is heartening to see RBI finally giving some importance to supply side measures and talking about the need for raising the potential rate of growth through the implementation of structural reforms.
RBI, however, did not give up its anti-inflation stance. "While the impact of past monetary actions is still unfolding, it is necessary to persist with the anti-inflationary stance," RBI said.
The central bank also warned medium-term inflationary risks in Asia's third-largest economy remained high due to structural imbalances in agriculture, infrastructure bottlenecks, and the fiscal deficit.
"In the absence of progress on these, over the medium term, the monetary policy stance will have to take into account the risks of inflation surging in response to even moderate growth," it said.
Among other decisions, RBI has sought to boost the government bond market by suggesting a working group to recommend ways for enhancing secondary market liquidity in the government bond and interest derivative market.
In addition, RBI will issue guidelines on short sale of government securities by December.
In order to safeguard customers from mispricing of risk by banks, RBI also said it would set up a working group to look into the principles governing proper, transparent and non-discriminatory loan prices.