Another 0.5% repo hike in offing, say analysts

RBI chief Raghuram Rajan spooked markets at his maiden policy announcement by increasing repo rate by 0.25% citing increased worries on inflation

Having been surprised by the repo rate increase on inflation concern, analysts expect new Reserve Bank Governor Raghuram Rajan to hike the key rate by another 0.50 percentage points this fiscal.

The repo rate hike "indicates that the new Governor is focusing more on inflation than growth. We now expect RBI to increase repo rate by 0.25% each at the next two policy meetings to 8% by end of 2013," house economists at British lender Standard Chartered said.
  
Stating that the Reserve Bank has shifted to an "inflation targeting framework" without explicitly saying so, Japanese brokerage Nomura said it expects a 0.50% hike in repo rate this fiscal.

"We are changing our policy call because of this sudden regime shift. Our baseline view has been a continuation of the status quo on policy rates in FY14, followed by a 0.75% repo rate cuts in FY15. We now expect repo rates to be hiked by 50 bps to 8% in FY14, followed by a prolonged pause," it said.

Without quantifying the expected hikes, the Credit Suisse economist also said they expect one or two more repo rate increases from in the next few months.

Rajan, a celebrated monetary economist from the Chicago Business School, spooked the markets at his maiden policy announcement by increasing the repo rate by 0.25% citing increased worries on inflation.

Reacting to the move, Pratip Chaudhuri, the chairman of the country's largest lender State Bank of India, said he would be forced to increase the lending rates, much to the dismay of the borrowers.

The support for growth came from the decision to cut the marginal standing facility by 0.75% to 9.5%, which according to the ratings agency Crisil will help bring down cost of funds for banks by 0.4%, if we go by past references on their borrowings.

The Standard Chartered economists clarified that even the two actions on the repo and MSF look contradictory, their aims are not different.

The MSF hike in July was to arrest the steep fall in the rupee and we should expect more cuts as the currency stabilises while the repo is aimed solely at inflation numbers, which grew to 6.1% at the wholesale level and the consumer inflation continued to remain over 9%.

Nomura said that the new framework being charted out by Governor Rajan lays a greater focus on the retail price rise.

"We see the RBI action as a medium-term positive as it should bring down inflation expectations and help correct macroeconomic imbalances," it added.