2014 may not see interest rate reversal

Inflation expected to stay elevated

Year 2014 may not see a reversal in the interest rate cycle with inflation likely to stay at elevated levels. Most experts believe the repo rate will be increased yet again with the next one expected in the first quarter (January-March) of calendar year 2014.

“There may be another hike in the repo rate by 25 basis points and then RBI (Reserve Bank of India) may go for a status quo in 2014 since the inflation is expected to come down only gradually. The 25-basis point repo rate hike will happen in the January-March quarter,” said A Prasanna, chief economist, ICICI Securities Primary Dealership.

The repo rate or the rate at which banks borrow from the RBI currently stands at 7.75 per cent. At the beginning of 2013, this was at eight per cent. During the year, the rate was brought down to 7.25 per cent and then again increased to 7.75 per cent.

Consumer price index (CPI)-based inflation rose to 11.24 per cent in November compared with October’s 10.17 per cent. Wholesale price index (WPI)-based inflation data for November also rose to 7.52 per cent from seven per cent the previous month.

The CPI and WPI data for December 2013 holds the key for the third-quarter monetary policy review to be announced later this month.

“I am expecting a 50 basis points hike in repo rate in the next six months and after that, RBI may take a pause mode for the next six months. The reasons for further rise in repo rate are, the rupee may continue to be weak, global rates may continue to be higher, it will take time for the national savings in the economy to actually rise and inflation may come down only gradually,” said Dhananjay Sinha, head of institutional research at Emkay Global Financial Services.

However, a few economists do not expect further increase in repo rate this year. According to them, RBI may opt for a rise in the cash reserve ratio (CRR), which is currently four per cent of banks’ net demand and time liabilities.

“Fiscal policy remains accommodative, rural spending growth has been healthy and supply chain management issues continue. Due to these factors, there will not be any sudden reversal in interest rates. The divergence between core WPI and core CPI has increased so much that I do not think there will be any drastic action in interest rates. But if RBI wants to see the transmission to happen, then it will have to control liquidity. There may be CRR increase of 50 basis points this year to tighten the liquidity so that transmission will happen. RBI may go for pause with the repo rate,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.

The CRR currently stands at 4% of banks net demand and time liabilities.