RBI Seen Raising Rates On Friday Before Pausing

12 September, 2011

The Reserve Bank of India (RBI) is widely seen delivering the last rate increase in its 18-month-long tightening cycle on Friday as inflation pressures continue to remain strong, a Reuters poll of 18 economists showed.

Of those polled, 15 expect a 25 basis point increase in the repo rate, one expects a 50 basis point hike, and two expect no change.

An increase would be the 12th in the current cycle and would take the repo rate, the central bank’s key lending rate, to 8.25 per cent, where most economists see it staying until at least the end of the fiscal year in March.

The median expectation for the rate at the end of March has been lowered by 25 basis points from the previous poll conducted in July, largely due to deteriorating global economic conditions.

“We are expecting a 25 basis point hike. The RBI has been pretty clear about the fact that given the extent of the inflation pressures, more needs to be done,” said Abheek Barua, chief economist with HDFC Bank.

“In this policy review, if they talk about the changing international situation, then they might as well build a case for halting with this rate hike,” he added.

The European Central Bank, Bank of England, and Swedish Central Bank among others continued to hold rates steady at reviews last week amid easing inflationary pressures in the euro zone and concerns over weakening growth prospects.

The RBI has been one of the most hawkish central banks globally. However, economists said the July industrial output date to be released on Monday and August inflation data due on Wednesday would be key determinants for the RBI’s actions on Friday.

“If the core inflation number is still in the range of 7-7.5 per cent, my sense is that the RBI will persist with a interest hike,” said Madan Sabnavis, chief economist at CARE Ratings.

“So it’s only in case it comes substantially down, if it comes around 6 per cent, will it take a pause. That number will be very critical.”

Of the polled economists, 11 said the RBI’s tightening was appropriate, while 5 said less aggressive tightening was needed.

 


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RBI Seen Raising Rates On Friday Before Pausing

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