Wait and watch

Mumbai, July 27: Bankers are sharply divided over the prospect of the Reserve Bank of India (RBI) raising a key short-term interest rate at its quarterly review of monetary policy on July 29.

A section of the market feels that the moderation in crude oil prices and a marginal dip in inflation can persuade the central bank to hold its hand even as it continues to articulate its hawkish position on monetary policy.

However, there are others who feel that the RBI governor Y.V. Reddy will be forced to raise the repo rate by 25 basis points as inflation continues to hover at double-digit levels

The repo is the rate at which the central bank provides funds to banks. On June 24, the RBI had surprised the markets by raising the repo rate by 50 basis points to 8.50 per cent in a bid to control inflation which had spiralled up to 11.05 per cent at that stage.

The move forced banks and housing finance companies to raise interest rates on home and other loans by 75 basis points in some cases. On that occasion, the RBI had also hiked the cash reserve ratio (CRR) by half a percentage point to 8.75 per cent. CRR is that portion of deposits that must be compulsorily kept with the RBI. It was hiked on two occasions in April by 75 basis points.

Some bankers argue that after the sharp increase in key interest rates in recent times, the RBI may decide to keep the rates unchanged on Tuesday.

“Recently, there have been a couple of key developments. First, inflation appears to be plateauing and it came down marginally to 11.89 per cent recently. Second, global crude oil prices have also come down significantly from their all-time highs. Moreover, the industry has also slowed down and, therefore, the RBI may give growth a priority” said a senior official with a foreign bank who did not wish to be identified.

The official said that the central bank would maintain a hawkish stance in the policy, warning that it could respond swiftly to any circumstances.

This view is, however, not shared by another section which feels that the central bank will not miss out on the opportunity to tackle inflation and reckon that a moderate hike of 25 basis points in either the repo or CRR is round the corner.

“Inflation may have come down marginally, but it is still at double-digit levels. Even as money supply growth continues to be high, inflationary pressures remain. Inflation could cross 13 per cent in the months to come. The RBI will, therefore, hike the repo rate by 25 basis points,” said a treasury chief with a private sector bank.

He added that if the RBI decided not to raise the repo rate, it could tinker with CRR.