Experts draw 'Laxman rekha' on RBI hikes

New Delhi: With the RBI raising rates for the 8th time, experts have drawn a danger line for the Indian economy, reminding one of the proverbial 'Laxman rekha' that was to safeguard Sita – the consequences are there for all to see in the epic 'Ramayana'.

Terming the RBI's move to raise key policy rates by 25 basis points as in-line with market expectations, analysts said the apex bank should not go for any further rate hikes in the current year in order to keep the India growth story intact.

The Reserve Bank of India today raised its short-term lending (repo) rate and borrowing (reverse repo) rate by 25 basis points each to 6.75 per cent and 5.75 per cent, respectively, for the eighth time since March, 2010 in a bid to rein in inflation.

Market observers (experts' reactions) feel the 25 basis points hike by the apex bank is on expected lines and was discounted by the market.

"RBI has acted on expected lines. The problem of inflation is still on top of RBI's mind, so they have continued tightening monetary policy even at the cost of growth momentum slackening," Motilal Oswal Financial Services Joint Managing Director Raamdeo Agrawal said.

Analysts feel the RBI should not opt for another hike in the calendar year as it may hurt the economic growth of the country.

"The increase of 25 basis points would be detrimental to our economic growth estimates and if banks opted to pass on all the increase to consumers, the capital formation in the economy will remain subdued.

The inflation should come down in the fiscal year 2012, and this rate increase is almost all the increase we need in this calendar year," MAPE Securities Head (Research) Kislay Kanth said.

Kanth added the RBI raising the inflation projection to 8 per cent for March-end, against 7 per cent estimated earlier is a matter of concern.

Echoing Kanth's opinion, Padmakshi Financial Services Director (Institutional Equities) & Chief Strategist Sailav Kaji said, "We believe RBI is near end of tightening as inflation is expected to moderate with lag".

Experts also feel the government needs to come out with more policies to tackle food inflation apart from the measures taken by monetary authorities, in view of the rising global uncertainties and soaring oil prices as the RBI's continuous rate hikes may impact India's long-term growth story.

Source: Financial Express