'RBI signals pause in rate hikes this Dec'

Anubhuti Sahay, economist, Standard Chartered Bank talks to Krishna Merchant on the RBI rate action and likely economic growth.

Was the 25 basis points (bps) rate hike in repo and reverse repo in line with your expectation?

Yes, the rate hike was in line with expectation and there were no surprises. The Reserve Bank of India (RBI) has signaled that monetary tightening will be paused in December mid-term policy meeting.

In 2011, further rate action, if any, will be conditional on upside surprises on inflation.

Industrial output or the month of August declined to 5.6%. Do you see rate hike affecting growth?

The Index of Industrial Production (IIP) series has been very volatile in the past few months. Instead of focusing on one month’s data (5.6% in August or 15.2% July) it is better to look at average data of past three - six months, as it will give a better assessment of industrial growth.

From April to August, industrial sector grew at 10.6%, which is still a strong number. Going forward, given elevated base effect which has already kicked in, IIP will print in single digits, 8.5% on average for FY11.

Will the rate hike put further pressure on liquidity in the system?

On the liquidity front, RBI post the policy has announced an OMO (Open Market Operations) in liquid papers on 4 November, which indicates RBI’s concern about the tight liquidity scenario. Since this OMO has been offered in more liquid papers, market response is expected to be better than the previous buyback.

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