With Reserve Bank of India (RBI) governor Yaga Venugopal Reddy describing the spurt in inflation to 6.68% as ?unacceptably high? and economists predicting 8% soon, bankers and money markets now expect swift, multi-pronged action by the central bank via a mix of key short-term rate hikes and a cash reserve ratio (CRR) increase.
Various players feel RBI may not even wait for its annual monetary and credit policy announcement slated for April 29. ?We expect RBI to announce some urgent measures very soon, maybe this week itself. RBI may go in for both a hike in CRR and a hike in the reverse repo rate to suck out liquidity,? said a senior banker. ?A sharp increase to deal a body blow to inflation should not come as a surprise.?
Higher interest rates, along with a stronger currency and weak global growth, are now taking their toll and will continue to do so. The economy has already begun to see supply-side constraints. WPI-based inflation could further outstrip RBI?s 5% target, possibly reaching 8%, and prove slow in dropping back again.
?It is important to bear in mind that measured inflation in India has little to do with domestic economic developments but more to do with international commodity prices,? said Robert Prior-Wandesforde, an economist at HSBC Group Plc in Singapore.
According to him, at this stage, RBI and the government may be more willing to let the rupee appreciate as a means of controlling inflation. ?It?s more effective in our view than raising interest rates. Any renewed upward pressure on the rupee is unlikely to be resisted that strongly,? he said.
?The rupee rallied 1.3% during the week to 39.90/$ from 40.43/$. The recovery was prompted by improved global market conditions and positive FII flows. We maintain our view on rupee appreciation,? added Rohini Malkani, economist at Citibank. Assuming the absence of price controls, inflation is likely to remain well over the comfort zone of 5%, which could result in yields, currently at 7.87%, rising further, she said.
Only recently, some public sector banks had announced rate cuts on a call given by finance minister P Chidambaram. However, IDBI, which had earlier decided to go for a benchmark prime lending rate cut of 50 basis points, later deferred the decision as it became clear that the dynamics had changed quite dramatically. Speaking to FE, IDBI CFO RK Bansal said: ?Let us wait and watch. Inflationary expectations are high and we thought it better to put our decision on hold.?
KC Chakrabarty, CMD, Punjab National Bank, said: ?I am of the view that interest rates will not come down from the current levels. It can come down only when inflationary expectations go southwards, which is possible only when global uncertainties disappear.?
A senior State Bank of India official said: ?We are watching the difficult situation and would respond accordingly.? Further import duty reductions, for example, look imminent although the growing risk of a budgetary overshoot means the room for manoeuvre is limited, said bankers.