Mumbai, Sept. 11: The central bankers at four Asian countries — South Korea, the Philippines, Indonesia and Malaysia — have hit the pause button on rate increases even though they have been battling the spectre of rising inflation just as India.
Is there a cue here that Reserve Bank of India governor Duvvuri Subbarao and his bunch of policymakers will take when they hunker down for the mid-quarter review of the monetary policy on September 16?
Early last week, finance minister Pranab Mukherjee said at an event organised by the Confederation of Indian Industry that the central bank could hold off on a rate hike as the economy had started to slow.
I agree with the finance minister that the RBI should pause on rate hikes, Planning Commission deputy chairman Montek Singh Ahluwalia said last Thursday.
Bankers and corporate honchos are also beginning to wonder whether Subbarao will abandon his hawkish monetary stance and slam the brakes on the repo rate hikes that started in March last year. The repo has been raised 11 times in about 18 months, going up 325 basis points to 8 per cent — the most frenetic rate increase anywhere in the world. The repo is the rate at which the RBI provides liquidity to banks.
In July — the latest month for which data is available — inflation was running at 9.22 per cent, marginally down from the 9.44 per cent in the previous month. Data for August will come out on September 14, just two days before the RBI policymakers meet to review the monetary policy.
Data for August will be a key factor in deciding whether the RBI hits the pause button. It chose to pass up the opportunity to raise rates only once — on April 24 — out of the past 12 policy review meetings (see table).
Last Thursday, South Korea, Indonesia, the Philippines and Malaysia kept their benchmark borrowing rates unchanged, even though their economies continue to battle inflation and start to slow down. Analysts said the worrying global situation — Europes debt crisis and the possibility of the US slipping back into recession — were the major factors that forced them to pause. Central banks in Australia, Sweden and Canada also recently announced that they were putting their rates on hold in view of the global challenges.
Brazils central bank went one step ahead: it cut its benchmark rate — the Selic — 50 basis points to 12 per cent. The rate cut was a huge surprise since inflation in Brazil soared to 7.23 per cent in August, the highest since June 2005.
Like India, Brazil has been one of the most aggressive central banks in raising rates to beat down inflation. It raised the Selic five times in this calendar year, prompting President Dilma Rousseff to urge the central bank to bring down interest rates.
However, most bankers and economists here expect the RBI to raise the repo by another 25 basis points and dont think it will be swayed by the decision taken by central bankers in other parts of Asia.
Yes, it is correct that many of the central banks in Asia have taken a pause. Their fight against inflation is different. It isnt as structural as it is in India, Rupa Rege Nitsure, chief economist at the Bank of Baroda (BoB), told The Telegraph. She expects Subbarao to either raise the repo rate by 50 basis points or nudge it up 25 basis points with a similar hike in the cash reserve ratio (CRR). She reckons the RBI will hit the pause button only after that.
CRR is currently at 6 per cent. It is the portion of the deposits that banks must park with the central bank.
Nitsure estimates that inflation for August will be around 9.6 per cent. She feels that inflationary trends in India are unlikely to ease significantly because the demand-pull pressures persist.
When we look at the inflation data, it is clear that demand factors have now slowed down significantly. Therefore, the RBI would prefer a GDP growth of 7.5 per cent and inflation of around 7 per cent. That is more acceptable than GDP growth of over 8.5 per cent and inflation that is closer to double digits, she added.
Jitendra Arora, senior vice-president (investments) at ICICI Prudential Life Insurance, admitted that it would be a close call between a pause and a small rate hike, with the balance tilted slightly in favour of a 25 basis point rate increase.
I believe that the RBI will not pause given its stance on inflation and that not much has changed over the last six weeks with respect to the reasons cited by the RBI, while raising rates by 50 basis points in the last meeting — a wage price spiral, stubborn food inflation and high oil prices, he added.
Arora said the most likely scenario would be a 25 basis point repo rate hike after which the RBI might pause as long as there was no further surge in crude oil prices.
However, the RBI could mellow down its hawkish tone. It may indicate that risks to growth have increased and that the balance between growth and inflation may not be completely in favour of inflation from policymakers perspective.
Last week, Subbarao did appear to soften his tone when he said that the statutory liquidity ratio — which is pegged at 24 per cent — and CRR needed to come down gradually. SLR is the minimum amount that banks must set aside to invest in government bonds and other approved securities.