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Tightening The Purse Strings

by on Apr 21, 2010

  • 1,120 views

Economists expect hike in interest rates in the current fiscal ...

Economists expect hike in interest rates in the current fiscal

The Reserve Bank of India (RBI) is due to unveil the annual monetary policy statement for the fiscal ending March 2011 (FY 2011) on 20 April 2010. The challenges facing the central bank are managing the recovery as well as maintain price stability with the fasterthan- expected recovery in industrial production and inflation. Capital Market’s Yogesh Kulkarni and Vijay Ghutukade,
quizzed Manoranjan Sharma, Chief Economist and Deputy General Manager, Canara Bank; Sumita Kale, Chief Economist, Indicus Analytics; Indranil Pan, Chief Economist, Kotak Mahindra Bank; Sujan Hajra, Chief Economist, Anand Rathi Financial Services; and Krupesh Thakkar, Research Analyst, India Capital Markets, on the options for the central bank.
Excerpts:
Higher inflation is raising anxiety. What should the RBI do?
Manoranjan Sharma: The RBI should continue with its stance of monetary tightening throughout this calendar year. We see all rates — cash reserve ratio (CRR), statutory liquidity ratio, repo and reverse repo — going steeply up by December 2010. The Raghuram Rajan Committee’s report on the financial sector reforms made a case for inflation targeting as done in of the world,
including the US and the UK and the European Central Bank.
Sumita Kale: Monetary tightening has been on the cards for a while now. The question of timing and quantum of raise at each step over the year will depend on how the credit flows are increasing to the requisite sectors and whether capex plans are being undertaken or not. Inflation has already picked up in manufacturing items. So rates are warranted to influence inflation expectations.
Indranil Pan: The RBI could be increasing the reverse repo rate by around 100 bps-150 bps in FY 2011 over the current 3.25%. Further, we expect the CRR to rise by around 75 bps-100 bps including a 50-bp hike on 20 April 20 in FY 2011. In its effort to remove the monetary stimulus, the central bank’s actions are likely to remain measured and, in turn, ensuring that the reverse repo rate remains the operative rate in FY 2011.
Sujan Hajra: The RBI is likely to go for at least another 25-bp hike in the repo and reverse repo rates in the policy meet on 20 April 2010.
Krupesh Thakkar: We expect a cumulative hike of at least 100 basis points (bps) in key policy rates and 75 bps in CRR in the current fiscal, with expectation of a possible 25-bp rise in the repo and reverse repo rate in the coming policy meet. Is growing food inflation becoming an obstacle for growth?
Manoranjan Sharma: Monetary policy can have only a limited impact on managing food inflation.
Sumita Kale: Inflation eats away at household budgets, negating the positive impact of growth. The need to overhaul the pricing policies, distribution strategies, and raise productivity have all been well known for many years now. The political will to make these changes is needed urgently now.
Krupesh Thakkar: The short-term interest rates on commercial paper and corporate deposits could go up in the near term. So the yield curve would get steeper suggesting two things: economy growth for a longer period and high future inflation. This, in turn, will result in upward pressure on long-term rates to attract savings.
What are your expectations on inflation numbers amid the faster-than-expected recovery in industrial production?
Manoranjan Sharma: Inflation would continue to be at a high level for the next two months but gradually fall because of mutually reinforcing dynamics of good rabi crop, lagged effect of monetary tightening measures by the RBI and the base effect.
Sumita Kale: There has been a upsurge in prices of commodities such as crude, steel and rubber globally, not just in India, this year. Clearly inflationary pressures cannot be ruled out over the year. The Wholesale Price Index estimates will trend down over the year touching 5%-6% by December 2010.
Krupesh Thakkar: With better prospect

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Tightening The Purse Strings Tightening The Purse Strings Document Transcript