*Bankers see calibrated rate increases by RBI * **
** ** *25-bps hike in repo, reverse repo rates likely now. * The Reserve Bank of India logo Our Bureau Mumbai, June 25 The Reserve Bank of India may hike its signal rates – repo and reverse repo – by 25 basis points each in two stages over the next one month to tackle rising inflationary pressures, say bankers and economists. Currently, the repo rate (the interest that banks pay on funds borrowed from the RBI) is 5.25 per cent, while the reverse repo rate (the interest that banks receive for deploying excess funds with the RBI) is 3.75 per cent. The stage may have been set for further calibrated rate increases as food inflation has jumped to 16.90 per cent in the week ended June 12 as against 16.12 per cent in the previous week. Also compounding the inflationary spiral is the Government's decision on Friday to increase the price of transportation fuel, diesel, by Rs 2 a litre. The Government has also freed up subsidised petrol prices and raised the prices of other fuels. “We expect a two-stage hike of 25 basis points each in the repo and reverse repo rates to cool inflationary pressures. Now that the Government has increased fuel price, it will face less pressure on account of subsidies, which in turn should have a positive impact on India's rating,” said Mr Moses Harding, Head-Global Market Group, IndusInd Bank. Market players are of the view that if the RBI effects less than 25 basis points hike in interest rates, then the yield on the benchmark 7.80 per cent 2020 Government Security could soften to 7.50 per cent or lower. If the hike is more than 50 basis points, then the yield could surge beyond 7.75 per cent. Yield surges The yield on the benchmark paper jumped by about 8 basis points (or the price fell by about 60 paise) following the announcement of the fuel price hike and the announcement of cut-off yield at the auction which was out of sync with market expectations. Mr Hemant Mishr, Managing Director and Head-Global Markets, South Asia, Standard Chartered Bank, said, “The hike in fuel prices will result in higher inflation over the short end. We expect an increase of 125-135 basis points in the wholesale price index inflation by July. There would also be a hike in secondary inflation due to rise in cost of commodities and transportation.” Although the hike was expected, the decision is stronger than what the market was expecting. Over the short term, the impact would be negative, but over the longer term, it would be positive because fiscal deficit would be lower. Oil companies will benefit from this move and will make good some of their losses. The RBI may hike key rates by 25 basis points now and by 25 basis points in the July Credit Policy. If the RBI does not hike interest rates now, then it would hike rates by 50 basis points in the July policy. But a 50 basis point hike in the policy would be more effective, said Mr Mishr. Ms Deepali Bhargava, Economist, Financial Markets, ING Vyaya Bank, said in a report that the inflation trajectory is going to turn steeper with the fuel price hike. “We expect June WPI inflation at 11.6 per cent year-on-year and FY ‘11 average inflation is likely to be 9.3 per cent. Considering the swift change in inflation trajectory, we expect the RBI to turn hawkish and now expect a 50 bps hike in repo and reverse repo rates in the July policy. A combination of a rate hike together with some liquidity easing measures before the July policy is increasingly looking likely,” she said. Last week in Hyderabad, the RBI Governor, Dr D. Subbarao, said that supply-side inflation was spreading and demand-side pressures were building up. “The effective rate has moved up from the reverse repo rate which is at 3.75 per cent to the repo rate which is at 5.25 per cent. So there has been some automatic tightening which has taken place,” Dr Subbarao said. http://www.thehindubusinessline.com/2010/06/26/stories/2010062652710600.htm -- You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected]. To unsubscribe from this group, send email to [email protected]. For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en.
