HSBC says Raghuram Rajan to up repo rate by 0.25 pct

Written by PTI | Mumbai | Updated: Oct 26 2013, 04:49am hrs
Foreign brokerage HSBC today said it expects RBI Governor Raghuram Rajan to deliver on his promise to anchor inflationary expectations by hiking repo rate by 0.25 per cent and cut the marginal standing facility rate by an equal measure next Tuesday as rupee has stabilised.

"Despite the weak growth backdrop, we expect the RBI will further raise the policy rate by 0.25 per cent to deliver on its hawkish promise and, through this, help anchor inflation expectations," HSBC economist Leif Eskesen said.

Rajan, who had delivered an unexpected 0.25 per cent hike in the repo rate at which RBI lends to the system and cut the MSF rate by 0.75 per cent at his maiden policy review on September 20, is scheduled to announce the second quarter review of the monetary policy on Tuesday.

Headline inflation climbed up to a seven month high of 6.46 per cent in September but the industrial activity remains subdued, while GDP grew at a four-year low of 4.4 per cent on Q1.

The MSF rate, that was hiked as part of RBI firefighting to prop the bleeding rupee by reducing speculation on the rupee, will be reduced by 0.25 per cent in the review, HSBC said.

"With the currency having stabilised, RBI is also expected to continue rollback of the currency stabilisation measures," the note said.

Rajan had said he intended to narrow the gap between the MSF, at which banks have to borrow if they exceed their limits from the overnight borrowing window, and the repo rate to the normal 1 percentage point from the current 1.5 per cent.

There is not single analyst or agency which is expecting a rate cut but everybody is united in their view of a 25 bps (0.25 per cent) hike.