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Mumbai, July 26: The RBI today took the monetary policy equivalent of a sledgehammer to clobber inflation by raising the benchmark interest rate — the repo — by an unexpected 50 basis points to 8 per cent, sparking another round of lending rate hikes.
The repo is the rate at which the central bank provides short-term cash to banks.
While articulating a severely hawkish monetary policy, RBI governor Duvvuri Subbarao brushed aside pleas from bankers and industrialists to hit the pause button on the rate hike cycle that started in March last year even as he seemed to rubbish the popular view that the $1-trillion Indian economy has started to slow down.
The signals coming from Mint Road — where the 25-storey structure that houses the headquarters of the country’s central bank sticks out as an architectural anachronism among Edwardian-style buildings — had clearly indicated that a rate hike was coming.
But not many had expected Subbarao to bear down on inflation — which is currently running at 9.5 per cent — with a 50-basis-point increase.
The sensex sank 353 points to 18518 even as Yes Bank was the first to increase its base rate by 50 basis points to 10.25 per cent with immediate effect.
Both State Bank of India chairperson Pratip Chaudhuri and HDFC Bank’s managing director Aditya Puri said interest rates on loans would rise “very quickly” but didn’t say by how much.
Tuesday’s rate hikes makes the RBI one of the most hawkish central bankers in the world having raised interest rates by 325 basis points within a short span of 16 months, showing a penchant to pull the rate trigger more often than Brazil and Israel, which have also been tweaking rates.
Brazil has raised its benchmark rate by 375 basis points but that has been spaced over a two-year period since August 2009 and has been less frenetic than RBI’s.
Yet the RBI’s stratagem may not work.
Subbarao appeared to concede that he might be firing an ineffectual cannon to slay the demon that’s spooked the RBI’s policy mandarins and thrown a lighted match at kitchen budgets across the country.
The central bank said there was little sign of supportive policy action on the supply side to buttress the aggressive monetary policy stance. Inflation is expected to hover around current levels before moderating by the end of the year.
Virtually spiking the notion of an inflation-versus-growth debate, the RBI stuck to its growth forecast of 8 per cent made in May but raised its inflation forecast for March 2012 to 7 per cent from 6 per cent earlier.
“Certain moderation in growth is an inevitable price we have to pay for bringing down inflation in the short term,” Subbarao told reporters.
“There is no evidence as yet of a sharp or broad-based slowdown,” the RBI governor added. He, however, admitted that some indicators such as exports and imports, indirect tax collections, corporate sales and earnings, and demand for bank credit were suggesting that demand was moderating but only gradually.
Subbarao said the central bank would continue to watch price trends closely. Analysts said another rate hike could not be ruled out if inflation stayed above the RBI’s comfort zone.
Citigroup economist Rohini Malkani said the RBI could “elongate its tightening cycle by a further 50 basis points by December” as inflation could nudge into double digits in the coming months.
“There is still an element of suppressed inflation in the economy,” the RBI said in its first quarter monetary policy review.
“Despite the recent increase in administered fuel pries, the under-recoveries (by state-owned oil refiners) on account of subsidised fuel are estimated at over Rs 100,000 crore of which a major portion may have to be bore by the government. Regardless of how the issue is handled, there will be implications for inflation,’’ the central bank warned, adding that there were some administered items in the wholesale price index (WPI) basket whose prices may be increased in the coming months.
Inflation in India is principally measured against the WPI though it has other consumer indices as well.
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