'More rate hikes likely'

More rate hikes may be on the cards, say economists. Expectations of a pause in the tightening cycle have been belied by the higher-than-expected 50 bps hike in repo and reverse repo rates by the Reserve Bank of India.

HDFC Bank's Chief Economist, Mr Abheek Barua, termed the steps as 'serious tough talking' while Mr Rajrishi Singhal, Head, Policy & Research Dhanlaxmi Bank, called it a 'sledgehammer action'.

Mr Barua says in a research note, “More rate hikes are likely and could go beyond the 25 bps that we had predicted in September. Tightening is likely to end only if global commodity prices plummet or domestic agri-product prices crash. Neither seem likely. What is the implication? This degree of aggression in monetary policy will begin to bite both into investment and consumption demand. Full-on tightening of monetary policy and easing for that matter is often associated with either ‘undershooting’ or overshooting of economic growth below or above the targeted limits Thus, we see the likelihood going forward of a sub-8 per cent growth rate. Credit growth is likely to soften further and a year-end growth figure of 17 per cent could well be possible.”

Mr Leif Lybecker Eskesen, Chief Economist for India and Asean, HSBC, said, "We had argued in favour of a 50 bps hike but we did not think that the RBI had the "guts" to bring out the big guns. Thankfully, we were proven wrong. The more decisive move clearly demonstrates that inflation is the dominant concern, and that the RBI is not alarmed about the extent of moderation in the domestic economy. Also, as a more domestically oriented economy, it is for now simply monitoring the movements in global economic trends.

While the 50 bp hike was an aggressive move, this is not the end of it. The RBI is seriously concerned about anchoring inflation expectations and we expect that the policy (repo) rate will reach at least 8.25 per cent this year. In this context, it's also worth keeping in mind that a policy rate of around 8 is at best consistent with a neutral monetary policy stance. But, policy rates have to go higher than this to bring about a contractionary stance and, hence, the necessary slowdown in domestic demand. This is ultimately the policy stance that the RBI should strive for.

While the 50 bps hike today may give the RBI breathing room for a pause next time they meet (September), there is an equally high probability that growth and inflation will not ease as much as anticipated in the meantime, triggering another hike as soon as the next meeting.

Ms Deepali Bhargava, Economist, ING Vysya Bank, said, "Though a 50 bps hike today implies some kind of front-loading of rate hikes, there is nothing to suggest that the RBI is nearing an end to the rate hike cycle. Our preference is for another 25 bps hike in the September policy. This is when inflation begins to peak out and moderate for the RBI to go in for a pause. We target 8.60 per cent on the 10Y g-sec on a 6-month horizon on likely fiscal slippage. Some relief to the bond market may come from a lower credit growth target for banks which may result in increased flow of funds to government bonds on an incremental basis."

Mr Ashutosh Datar, Economist, IIFL, said that the RBI’s action to raise policy rate by 50 bps against market expectation of 25 bps in part reflects its desire to send a strong anti-inflationary message to market participants and in part reflects front loading of rate hikes. He said, “We expect another 25 bps rate hike and a pause thereafter to gauge the evolving growth-inflationary dynamic; however, policy easing is not on the cards yet. While inflation will ease in 2HFY12, in part due to base effect, full year inflation will average over 8 per cent.”

Senior economist Dr Arun Singh of Dun and Bradstreet however felt that with the higher-than-expected hike in repo rate, the likelihood of pause for rate hike has increased significantly. He added, “Going ahead, such high interest rates would not only help in tempering inflation expectations but would also curb the demand side pressures especially, investment demand. In such a scenario, the consequent moderation in the investment activity might restrain the GDP growth during the year.”