Will India buck global trend, hike interest rates?

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Will India buck global trend, hike interest rates?

Is it time for RBI to exit a loose monetary policy and raise interest rates? If the inflation policy is a guide to interest rate policy, India and Korea are likely to be the first nations to raise interest rates in Asia.

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Pravin Palande/ Forbes India

Is it time for RBI to exit a loose monetary policy and raise interest rates?

Inflation raises its ugly head:
If the inflation policy is a guide to interest rate policy, India and Korea are likely to be the first nations to raise interest rates in Asia. Inflation levels are higher than interest rates in both countries. According to Macquarie Research, real interest rate is minus 7.14% in India and for Korea it is 0.16 percent. Kaushal Sampat, COO, Dun & Bradstreet says, "D&B expects that the RBI may increase its CRR [cash reserve ratio] by 50 basis points by the end of the current fiscal. This may happen in two phases - a 25 basis points hike by the end of December 2009 and another 25 basis points by the end of March 2010."
Factories are working; optimism is higher:

Factory output is at a 22-month high. The D&B Composite Business Optimism Index is up at 143.2 for the fourth quarter of 2008-09. For the earlier quarter the index was at 132.1. The 8.4% rise in the index shows that corporate India is expecting better business coming in for this quarter. Already, the results that have come in have exceeded expectations across most sectors and the stock market resurgence has shown no signs of coming to a halt. Can the RBI afford to take a risk and extinguish the animal spirits by raising interest rates?

Australia, anyone?
Australia has raised interest rates for the first time after July last year. It is the first developed economy to do so by raising the overnight cash rate by a quarter of a percentage point to 3.25%. The Australian central bank's governor feels that forecasts for confidence measures are revised higher and growth in 2010 will follow the trend.