Eyes on growth cues in RBI policy

Mumbai, July 24: As RBI governor Duvvuri Subbarao prepares to table the apex bank’s first quarter review of the monetary policy on Tuesday, analysts are not so much concerned with another rate hike — rather they are placing more importance on the tone of the policy statement, with expectations that the RBI will take note of economic growth in its announcement.

The central bank has so far hiked the key repo rate 10 times since March last year to 7.50 per cent to rein in an obstinate inflation.

Economists are nearly unanimous in their view that the RBI will again raise the repo rate by 25 basis points, with headline inflation inching up to 9.44 per cent in June.

The repo rate is the rate at which the apex bank provides liquidity to banks.

The RBI’s action was followed by the banks hiking lending rates. The State Bank of India has raised its benchmark prime lending rate by 225 basis points since March last year.

These developments have not only affected some of the interest rate-sensitive sectors but also credit growth.

In a recent meeting with the RBI, senior bankers had urged the apex bank to put a brake on rate hikes, citing a slowdown in new loan sanctions and a drop in industrial output in May, the slowest in nine months.

HDFC Bank chief economist Abheek Barua had recently said, “In our assessment, the RBI rate action will continue to be driven somewhat mechanically by inflation data that remains way above its comfort zone. Thus a hike of 25 basis points in the policy rate seems almost certain on July 26.’’

However, the question that is now being asked is whether the RBI is at the end of its tightening cycle as the repo rate has already been hiked by 275 basis points.

Some analysts aver that the repo will not be hiked by more than 50 basis points from its current levels.

Speaking to The Telegraph, Jitendra Arora, senior vice-president (investments), ICICI Prudential Life Insurance, said the RBI was likely to hike the key rate by 25 basis points as inflation had refused to recede.

However, Arora said the central bank’s position on the way forward would be crucial. He is of the view that the RBI may soften its stance on rate hikes and will be less hawkish compared with its last policy statement since growth has slowed down.

“We may see the RBI giving more weightage to growth when it comes to future decisions,” he said.

Rupa Rege Nitsure, chief economist at the Bank of Baroda, expects a quarter of a percentage point rise in the repo rate. She said the RBI governor might offer some clarity on the rate after which it would take a breather.

She believes the central bank may watch the growth trajectory with equal importance in the future.

“Though controlling inflation will be high on the RBI’s agenda going forward, it will not be aggressive. This is because, the tightening done so far has led to some slowdown. If the RBI continues to raise rates too fast, it also does not augur well for the asset quality of banks’’, she notes.