DBS Bank expects 0.5% repo rate hike by RBI in next 3 months

The Reserve Bank is likely to increase short term lending (repo) rate by 0.5 percentage points by December in a bid to anchor inflationary expectations, DBS Bank said in a report.

"Shifting from our previous call of no-change into 2014, we now expect two 25 basis points (0.25%) rate hikes in the repo by end 2013-14. Risks are that the hikes might be frontloaded before December," it said.

This move will narrow the spread between the repo rate and retail inflation, in a bid to anchor inflationary expectations, it said.

These tweaks will also make the repo rate as the operative policy rate, just as the marginal standing facility (MSF) rate is normalised, it said.

A complete rollback of the liquidity measures, however, is unlikely before December, as the central bank will await better visibility on flows after the swap window closes in November, it added.

In contrast to expectations of a balanced and growth-supportive policy at his maiden policy review, new RBI Governor Raghuram Rajan surprised by raising the repo rate by 0.25% to 7.50% last week.

"While the hike was justified by the need to contain inflationary expectations, the July's extraordinary liquidity measures were partly unwound on the stable external environment" it said.

Besides, the MSF was lowered by 0.75% and the Cash Reserve Ratio (CRR) daily average requirement reduced marginally.

These adjustments were a nuanced approach to strike a balance between easing the stress on banks balance sheets on one hand, whilst keeping the rupee stability in view, it added.