No interest rate cuts coming anytime soon, warn analysts after RBI hikes repo rate

PTI Posted online: Tuesday, Jan 28, 2014 at 0000 hrs
Mumbai : Even after the Reserve Bank's surprise move to increase repo rate in today's policy review, many analysts say the risks to inflation continue to exist and there are chances of further hike.

The RBI today raised the key lending rate by 25 basis points to 8 per cent, while it left the cash reserve ratio unchanged at 4 per cent, saying the hike is needed to "set the economy securely on the recommended disinflationary path".

British brokerage HSBC said "the RBI is aptly concerned about the much too high and sticky core inflation reading. While it indicated that rates would be on hold in near term, we do not believe that this is the end of the tightening cycle. Further tightening is needed, in our view, to bring core inflation firmly under control."

Domestic lender Kotak Mahindra Bank, too, supported this view saying "even though today's policy decision was a bit of a surprise, the sense from the RBI is that there continues to be risk to the inflation dynamics on the upside, even after today's policy decision."

"There appears no chance for any rate reduction in the immediate future (at least in the first half of CY14), while further rate increases may not be totally ruled out, it said.

HDFC Bank Chief Economist Abheek Barua said the RBI move is unexpected and belied its own previous indication on December 18 that if inflation pressures moderate it could reduce the need to tighten monetary policy.

Rating agency Care said the rate hike indicates the RBI has clearly targeted CPI inflation as the variable to look out for. "We do not expect any change in rates in the next policy review (in April) as the 8 per cent threshold for CPI inflation is unlikely to be met by then."

Another rating agency Icra said the repo rate hike suggests that RBI is earnestly attempting to meet the targets for combined CPI set in the recommendations of the Urjit Patel Committee.

"Though the move will be negative for industry as borrowing costs are likely to inch up, the action indicates the near-term focus has clearly moved to according higher priority to inflation management over growth concerns. The hike in the repo rate may support the rupee in case of adverse external developments," it said.

"Based on the expected trajectory of CPI inflation, we expect an extended pause in terms of the repo rate, with a low likelihood that policy will turn accomodative in near term.

"However, the RBI is likely to continue to address frictional liquidity concerns through a combination of tools to ensure adequate flows to productive sectors," Icra said.

British bank Barclays, in a note, said while the RBI's action today is in some way part fallout from its aggressive December guidance, it seems the central bank has softened its guidance in this round and actually revealed its inclination to stay on hold in the coming months.

SBI, in a research report, said the primary reason for the rate hike was to ward of the contagion in the financial market.

"With this policy, the RBI has clearly shifted its focus towards achieving a stated inflation goal over the next couple of years," Crisil said in a research note.

The rating agency, believes, the future course of monetary policy will now be determined by the forecasts of CPI inflation, the new nominal anchor.

SBI's report sees CPI inflation to be closer to 8.5 per cent by March 2014, lower than 9 per cent RBI forecast.

"As per the future trajectory of the CPI, it will be purely dictated by the food prices with the onset of summer," it added.