Reddy: Money matters

Mumbai, Oct. 23: The odds appear heavily stacked in favour of a rate hike but Y.V. Reddy will be looking beyond the cost of money when he unwraps a credit policy against the backdrop of oil-aggravated price pangs.

A 25-basis point increase in the reverse repo rate ? what the Reserve Bank (RBI) pays banks for banks’ short-term cash ? is widely expected, but equally feared is the prospect of a rise in lending costs this will trigger.

The rate, now at 5 per cent, was last raised in April, prompting a 0.5 per cent increase in the cost of home loans. There was no change in the quarterly review in July, but the ranks of those who believe a hike is inevitable is larger than those who feel Reddy will hold his fire.

However, most agree that the bank rate, at 6 per cent, will be steady. Tarini Vaidya, treasurer at Centurion Bank, feels the RBI would not want to rock the growth momentum by touching this signalling device.

Behind a possible hike in the reverse repo rate is the creeping inflation, which hit 4.62 per cent for the week ended October 8 from 4.24 per cent a week ago. Many analysts expect to round off the year with 5 per cent; some worrywarts even see it flaring up to 6 per cent, on account of firm crude oil prices and strong demand in the economy. The RBI has forecast 5-5.5 per cent for the year.

According to Shuchita Mehta, an economist at Standard Chartered Bank, the narrowing interest rate differentials with the US and the rest of Asia, coupled with the tightening global rate cycle, will also push Reddy towards an increase. The US Federal Reserve has raised its key rate from 1 per cent in June last year to 3.75 per cent now. The rise at home has been only 0.5 per cent.

Sanjeet Singh of ICICI Securities feel the “balance of convenience is no longer in favour of status-quo”. His firm expects a 25-basis point increase in the reverse repo rate on Tuesday, to be followed by a similar hike in January.

Drag alert

Pitted against the rate hawks are those who believe rising rates will not cure infirmities arising out of inflation. One of them is Subir Gokarn, chief economist of Crisil, who is convinced macro-economic conditions do not warrant an increase at this point of time. He blames the pressures on oil prices ? not a symptom of demand-pull inflation that is amenable to manoeuvres through liquidity management. “A policy-induced increase in rates will hit industrial buoyancy,” he added. Rupa Rege Nitsure of Bank of Baroda feels the RBI is unlikely to touch rates in the interest of industrial recovery. Union Bank of India chief K. Cherian Varghese hoped the RBI would “resist the temptation” for a hike.