RBI to continue its calibrated tightening: Angel Broking

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Angel Broking feels the Reserve Bank of India would find it prudent to continue the process of gradual domestic monetary tightening. In a report released just ahead of tomorrow's credit policy, the brokerage firm said, "The growth momentum in the Indian economy looks well-entrenched with IIP growth at a healthy 11.5% YoY in May and credit growth zooming to 21.7% YoY in July. At the same time, continuing food inflation (12.6% YoY) has taken the overall WPI to double digits (10.6% YoY). Looking at the level of headline inflation, which is well above the RBI's target of 5.5%, as well as strong uptick in credit growth in the last few months, we believe that RBI would find it prudent to continue the process of gradual domestic monetary tightening."

The firm expects RBI to hike the repo and reverse repo rates by 25 bps each to 5.75% and 4.25%, respectively. A CNBC-TV18 poll of bankers and economist also predicted a 25 bps hike in the repo and reverse repo rates.

It expects the monetary tightening process to take the repo and reverse repo rates to 7% and 6.5%, by end-FY2011. "This will put an upward pressure on interest rates. But rates are almost 200-300 bps below their peak levels."

Angel Broking sees this gradual tightening continuing over a couple of years. "This is not expected to stifle economic growth or credit demand until it reaches an advanced state (at least 200 bps above the current levels)," the report said.

It does not expect a hike in the cash reserve ratio in the upcoming policy considering the current liquidity situation.

Also see:
RBI to hike reverse repo, repo by 0.25% on July 27: Poll  
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