Expert view

Written by fe Bureau | Updated: Oct 26 2011, 08:21am hrs
ASHUTOSH DATAR, ECONOMIST, IIFL

It looks like we have now reached peak of the interest rate cycle and, once inflation starts decelerating, we can expect the policy stance to shift towards addressing growth concerns. If things pan out as detailed by the RBI, we can expect a rate cut somewhere in the June quarter.

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA

I think interest rates have peaked now. Transmission is not happening, credit demand has dried up. So, by raising interest rates, they are not going to achieve anything. If RBI had raised (the rates) earlier in September by 50 basis points, it would have more effective.

ANUBHUTI SAHAY, ECONOMIST, STANCHART BANK

The FY12 GDP growth projection has been revised downward from 8% to 7.6%. While RBI has still stated that containing inflation and anchoring inflationary expectations are important, the focus is now shifting to stimulating investment and growth. Thus, after a period of pause in interest rate, a reversal in the interest rate cycle in 2012 will not surprise us.

SHAKTI SATAPATHY, ECONOMIST, AK CAPITAL

The current rate hike is justified on account of (the) inflation risk still persistent in the economy, coupled with a depreciating rupee and fiscal slippage. Further, the savings bank deregulation may prompt a rise in deposit growth, leading to a shift from consumption demand towards investment demand in the mid- to long-term.

RADHIKA RAO, ECONOMIST, FORECAST PTE

Onshore financial markets are rejoicing clear indications by the RBI that the end to the rate tightening cycle is in sight, as base effects prod the WPI prints lower at the turn of the year. Prima facie, post-policy comments still carry hawkish hues in our opinion as the central bank cites risks to credibility on any change in policy trajectory when inflation is still high. ... Deregulating savings is a step in the right direction and should benefit end-consumers.

INDRANIL PAN, CHIEF ECONOMIST, KOTAK MAHINDRA BANK

Clear direction from the RBI is now in place, that they are not looking at any more increase. A 25 basis-point hike and a clear signal of a pause is a more certain policy, definitely more dovish with a clear direction on inflation. Unless inflation surprises for some reason or the other, we are likely to see an extended pause for a minimum of 9-12 months.

ARUN SINGH, SENIOR ECONOMIST, DUN & BRADSTREET

Inflation has taken a bad shape for the economy. And if the central bank would have paused right now, there could have been a bubble formation somewhere in the economy. The RBI knows this and, therefore, taming inflation will remain its top priority. Hence, another 25 basis point rate hike in December should not be a surprise.

HM BHARUKA, MANAGING DIRECTOR, KANSAI NEROLAC

We are confident that no further rate hikes will take place, but worries about growth remain. The industry has been expecting a slowdown in the economy, but RBI was not acknowledging it. Finally, they have acknowledged it by lowering the growth forecast. For the paints industry, the constant rate increases have severely affected demand. So, we are hoping the rate rise cycle comes to an end with this.

ANIL GUPTA, CMD, KEI INDUSTRIES

Its a difficult scenario; our margins are getting hurt because of higher interest costs. On the other hand, our consumers like real estate firms are in a tight spot too. This is hurting demand for our products. Also, containing inflation by raising interest rates seems to be having no impact as the inflation is largely because of supply side issues.

DS KULKARNI, CMD, DS KULKARNI DEVELOPERS

Every industry runs on cashflows, and by raising rates, the RBI is curbing this flow. Thankfully, the spending power of Indians is not dead like that of the people in the US and the banks are still strong. But this development will slow GDP growth... and, by no means, curb the rising inflation.

VENU SRINIVASAN, CHAIRMAN, TVS MOTOR

The positive side is the language used by the RBI, indicating that it will look at moderating. I think the government and the RBI are getting concerned that we can get into a period of high inflation and low growth. Still, at this point in time, they could have put off the increase because the economy is likely to grow just above 7%. The two wheeler industry has grown by 19% in the first six months and will probably grow 12-14% in the next six months. We are likely to end up with a 15% growth this year.

SUNIL SIKKA, PRESIDENT, HAVELLS INDIA

So far, they have not been able to check inflation that remains unabated. They must look at some other means, instead of just keep raising the repo rate. We all know its a demand dampener. I hope it is the last one.

PABAN K KATAKY, DIRECTOR, EXIDE INDUSTRIES

The industry is already reeling under high interest rates. Things will get even worse after this. Funding costs will rise as interest rates will have a spiralling effect on everything. There will be pressure on profitability. The government seems to be thinking that only by increasing the rates they can bring down the inflation.

PRAVIN MALKANI, MD, PATEL REALTY INDIA

This is definitely going to impact the sector. They are choking out whatever breath is left in the market. We don't see the logic behind the hike. The direct impact of the hike would be on the EMIs of buyers, so new home buyers would hesitate to enter the market.

MARKET REACTION

n The 10-year benchmark bond yield fell 6 bps to 8.7%.

n The benchmark 5-year swap rate fell 7 bps to 7.33%, while the 1-year swap rate dropped 2 bps to 8.17%.

n The main share index extended its rise to 1%, before turning negative.

n The rupee was at 49.70 per dollar against 49.6950.

Background

n Annual inflation barely budged in September, staying above 9% for the 10th straight month. The wholesale price index rose 9.72%, on the back of a jump in fuel and power prices.

n The food price index rose 10.6% and the fuel price index climbed 15.17% in the year to October 8, compared with 9.32% and 15.10%, respectively, in the previous week.

n Industrial output grew 4.1% in August, over the previous year, lagging a Reuters poll forecast for 5% growth.

n Manufacturing growth nearly stalled in September, turning in its weakest showing since March 2009 on slowing output and order growth.

n GDP slipped to 7.7% in the three months through June.