Mumbai, Dec. 12: The jump in retail inflation to a nine-month high of 11.24 per cent in November could turn into a bad news for home and car loan borrowers with the Reserve Bank of India largely expected to raise the policy rate.
In fact, the question among observers is whether the central bank will now up the repo rate by 25 or 50 basis points in its battle against inflation, or will it resort to a combination of 25 basis points hike in the repo rate and a similar increase in the cash reserve ratio (CRR).
Till the retail inflation data came in, experts were divided between a status quo in the key rates and the probability of a 25-basis-point increase.
While the repo rate now stands at 7.75 per cent, CRR is at 4 per cent. The repo rate is that at which the central bank provides short-term liquidity to banks and CRR is that portion of bank deposits that must be maintained with the apex bank.
The RBI is set to announce its mid-quarter review of monetary policy on December 18.
While a few experts aver that RBI governor Raghuram Rajan will consider wholesale price index (WPI) data, which will be released on December 16, many point out that the higher-than-expected pace of retail inflation will certainly result in the apex bank increasing key rates next Wednesday.
Ahead of retail inflation data, the consensus estimate was that November CPI would be around 10 per cent.
“I will not be surprised if the RBI governor raises the repo rate even by 50 basis points,’’ a senior official from a private sector bank said.
The official pointed out that while the RBI generally tracked both the WPI and the retail inflation numbers before fixing interest rates, recent indications were that it might be focussing more on the CPI figure.
“The new RBI appears to be moving towards an inflation targeting regime (placing a greater weighting on CPI-based inflation measures),” Sonal Varma, economist at Nomura said in a note recently.
Speaking to The Telegraph, Rupa Rege Nitsure, chief economist, Bank of Baroda, said that as inflationary pressures had remained unabated, the mid-quarter review might even see the RBI combining a CRR hike of 25 basis points with a repo rate increase by the same margin to make policy transmission more effective.