50bps hike: Will RBI pause now, will rate cuts happen?
In a move that shocked the street, the Reserve Bank of India today raised repo and reverse repo rates by a higher-than-expected 50 basis points (bps) each. Bu
July 26, 2011 / 17:23 IST
Moneycontrol Bureau
In a move that shocked the street, the Reserve Bank of India today raised repo and reverse repo rates by a higher-than-expected 50 basis points (bps) each.This takes repo (rate at which RBI lends to banks) to 8% and reverse repo (rate at which it borrows) to 7%. This was exceeding market expectations that it would raise rates by 25 basis points. The cash reserve ratio (amount of funds that banks have to keep with RBI), however, has been left unchanged at 6%."This policy action was out of syllabus and to that extent the market will recalibrate its expectations and reactions subsequently. It is evident that global issues are more of a footnote to the whole policy rather than the centre of play," Anant Narayan of Standard Chartered Bank, said.According to Sonal Varma of Nomura Financial Advisory, the 50 bps hike suggests that there has been frontloading of the rate cycle. "Most people were expecting 25 bps this time and 25 bps in September. The Governor has completely removed that uncertainty; frontloaded that hike and is now going to be extremely data-dependent," she said.However, Robert Prior-Wandesforde, head of India and South East Asia economics at Credit Suisse, feels otherwise. He, in fact, goes on to congratulate the RBI on this move. According to him, the bank should have been much more aggressive in raising rates earlier. "India faces a big problem in terms of this price/wage spiral and extremely elevated inflation expectations. It needs to break that wage/price spiral; it needs to bring inflation expectations down for the good of the economy," he added.What will RBI do going forward?Unless there is a global commodity price shock, it's likely that the RBI may pause now for sometime and see how the economy is doing going forward, Varma said.Narayan also expects RBI
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