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Guessing game on RBI rate gambit

Mumbai, March 30: As RBI governor Raghuram Rajan prepares to unveil the first bi-monthly monetary policy on Tuesday, the question that’s doing the rounds is whether he will spring a surprise yet again in the form of a hike in the repo rate or a cut.

The apprehension comes amid a general expectation of a status quo in key policy rates.

In January, the apex bank had said another hike might not be warranted if retail inflation showed signs of moderation. Some analysts, however, maintain that a surprise cannot entirely be ruled out.

Retail inflation in February declined to 8.10 per cent from 8.79 per cent in the preceding month. Inflation, measured by the wholesale price index (WPI), also fell to a nine-month low of 4.68 per cent.

“While the RBI has been tracking the consumer price inflation (CPI) closely, the lower number of 8.10 per cent may lead to a marginal cut in the repo rate, if not a 25-basis-point reduction,” a senior banker said.

The repo rate is that at which the RBI provides short-term liquidity to banks. It now stands at 8 per cent.

However, some experts believe that a marginal hike cannot be discounted. They aver that though consumer price inflation (CPI) fell, prices continue to remain sticky. Moreover, food prices are also expected to remain firm in view of the unseasonal rain and hailstorms in some parts of the country.

“The recent memory also tells that the RBI has a penchant for surprising the markets, in which case the rates can go either side, but with a larger probability of a rate hike. We also believe that in case the rate hike takes place, there is also a possibility of a hike of smaller magnitude than 25 basis points that in itself will be a surprise,” Soumya Kanti Ghosh, chief economic adviser, economic research department of the State Bank of India, said.

Rajan has raised the repo rate on three occasions since taking over as governor in September.

In January, he had hiked the rate by 25 basis points at a time the markets were expecting a pause.

According to Harihar Krishnamoorthy, treasurer at FirstRand Bank, the fact that the CPI inflation is close to the glide path as suggested by the Urjit Patel committee (8 per cent by January 15), Rajan may hold his hand on a rate hike.

However, many expect the RBI to give a hawkish guidance on the conduct of monetary policy in the months ahead. It is felt that more tightening may be on the anvil because of upside risks to inflation.

“If the RBI intends to guide CPI inflation down to less than 6 per cent over the next couple of years, according to the recommendation of the Patel committee, more tightening will be needed, in our view,” a note from HSBC stated.

 
 
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