Rate expectations rise after Friday shock

By Suvashree Dey Choudhury

MUMBAI (Reuters) - Expectations for monetary policy have shifted towards further tightening after the Reserve Bank of India's surprise increase in the policy interest rate on Friday, a new Reuters poll shows.

Economists are now split over whether new RBI chief Raghuram Rajan will hike rates again at the central bank's next policy review on October 29.

Nearly half of those economists surveyed, 16 of 31, expect Rajan to leave rates on hold at the meeting, while 15 expect a further 25 basis point (bps) increase, which would bring the policy rate to 7.75 percent.

By the end of the fiscal year in March, however, the vast majority of respondents -- 25 of 31 -- expect the repo rate to be at least 7.75 percent.

Sixteen of those predicted the rate will climb to 8 percent, implying 50 bps of further tightening by then.

That compares with the last Reuters rate poll, which showed a slight majority among 41 respondents expected the rate would be reduced to 7 percent or lower by the end of March.

"Expectations of rate hikes have gone up now as monetary policy has given a clear and transparent signal that an upward bias on long-term interest rates will continue as long as there remains concern over currency stability and core inflation from CPI (consumer price index)," said Rupa Rege Nitsure, chief economist at Bank of Baroda.

Rajan's focus on curbing inflationary pressures despite growth languishing at a decade-low was not anticipated by economists, none of which had predicted in a Reuters poll that he would raise policy rates on September 20.

Rajan surprised markets with India's first policy rate increase in nearly two years in a bid to ward off rising inflation, while rolling back part of the increase in the marginal standing facility (MSF), an overnight rate, reassuring markets that recent liquidity tightening measures put in place to bolster the ailing rupee were temporary.

He cut the MSF rate on Friday by 75 bps to 9.50 percent. It had been increased in mid-July by 200 bps.

"Only lowering the MSF rate would have signalled an accommodative monetary policy, which was not what RBI wanted to signal," said Indranil Pan, chief economist at Kotak Mahindra Bank.

The new poll showed the majority of respondents expect a further cut in the MSF rate in October. Of 27 respondents, 16 expect at least 50 bps in MSF rate cuts next month while 5 expect a 25 bps cut and 6 predicted no change.

The rupee hit all-time lows against the U.S. dollar in late August amid a global emerging market sell-off and concners about India's record current account deficit. While the currency has clawed back some ground since Rajan took office on September 4, it has still depreciated more than 12 percent so far this year.

(Additional reporting by Swati Bhat, Archana Narayanan, Neha Dasgupta, Subhadip Sircar, Himank Sharma, Abhishek Vishnoi in Mumbai, and Sumanta Dey from Bangalore polling team; Editing by Kim Coghill)