Economists see 100 bps rate hike in 2011

MUMBAI: Economists expect the Reserve Bank of India to raise key policy rates by 50-100 basis points (1 bp is 0.01%) this year after they analysed the latest inflation figures released by the government. The annual inflation rate, measured by the variation in wholesale price indices (WPI) rose 8.3% in January.

Though much of the price rise, which has moderated over the previous month’s levels, has been largely due to supplyside factors, economists expect the Reserve Bank of India’s job, which is essentially focused on managing the demand side, to be more complicated.

“The current spell of inflation in India remains supply driven, but an elevated headline print and sticky core inflation will make the job of the central bank more complicated,” said a report by Sidharth Sanyal and Rahul Bajoria of Barclays Capital. The central bank continues to prioritise inflation management over growth concerns.

We expect RBI to deliver another 75 bps hike in the repo rate during 2011, taking it to 7.25% end of the year. However , given the current structural pressure on liquidity along with high inflation, we think policy rate hikes may no longer be “costless” for future growth,” it said.

“We maintain our view of RBI hiking by an additional 50bps in 2011. This would take the repo and reverse-repo rates up to 7% and 6%, respectively,” said a report by Rohini Malkani of Citi. “The composition of food inflation reveals that persistently high prices appear to have a structural as well as cyclical component . This, coupled with higher oil prices, is likely to result in inflation being sticky at 6.5-7 % with an upward bias through 2011.” Besides, both HSBC and Deutsche Bank expect RBI to raise rates by 100bps.

“We expect the central bank to hike policy rates by 100bps through the course of 2011, taking the repo rate to 7.5% by the end of the year,” said a report by Taimur Baig and Kaushik Das. “We see substantial risks of WPI inflation remaining higher than RBI’s forecast of 7% by end-March 2011.

A bigger concern is that from the second quarter of 2011, the base effect would turn adverse and put further pressure on WPI inflation,“ they said in the report. “Add to that a likelihood of a nominal hike in diesel (5-6 %) and petrol (10%) prices by mid year, there is then little scope of WPI inflation to stabilise below 8% through the course of 2011,” the report further added.

By-Economic Times