Yet another 25bps rate hike on July 26, says CNBC-TV18 poll

Industrial production numbers were down to 5.6% in May; corporate results are showing telltale evidence of falling sales and margins. Falling margins indicate an inability of producers to pass on prices. And yet on the other hand inflation remains high at 9.4% and is set to go higher if producers pass on the fuel price hikes. The Reserve Bank of India (RBI) faces an ugly contradiction-slowing growth and rising inflation. So what's the market expecting it will do on July 26, in its credit policy? CNBC-TV18's Gopika Gopakumar and Vidhi Godiawala give a lowdown.

RBI Governor is expected to continue his anti-inflationary stance in the first quarter monetary policy review on July 26. 85% of the respondents polled by CNBC-TV18 expect RBI to hike the repo rate by 25 basis points, 15% say the RBI will acknowledge slow growth and pause its tightening cycle and a small minority argue there is a case of a 50 bps repo rate hike.

Leif Eskesen, chief economist, ASEAN and India, HSBC, said, "We think there is a case for 50 bps in the next policy meeting but we do think the RBI will move by 25bps. They will also look at what's happening globally that will temper their degree of aggressiveness."

While the July hike is expected by a high majority, opinion is divided on what thereafter. 55% of those polled expect RBI to hike the repo rate by another 25 basis points after the July 26 rate hike. 45% said they don't expect RBI to increase rates further in FY12.

Rana Kapoor, founder, managing director and chief executive officer, Yes Bank, said, "We are probably at a peak level in terms of interest rates. While there may be some correction and calibration in repo rates as the market is generally expecting, the damage on industrial production and industrial growth, on output and structural implications are severe now of any further interest rate hikes. We are probably at the very end of increasing cycle."

Rate hikes will mean slower growth, but 75% of those polled expect RBI to retain its gross domestic product growth forecast at 8%, 25% see the central bank scaling down its growth forecast between 7.5-8%. As for inflation, 65% said RBI will leave its March end inflation forecast unchanged at 6%. 35% expect RBI to raise its inflation forecast above 6%.

A majority (65%) doesn't expect banks to increase lending or deposit rates immediately if the RBI hikes the repo rate on July 26. 35% see banks passing on costs to their borrowers. Bankers will decide post the policy announcement and their decision will depend on their bank's cost of funds.

Arun Kaul, chairman and managing director of UCO Bank, said, "We'll have to wait and see how liquidity shapes up. If my cost of fund moves up I have no option but to pass it on to my customer."

While, MV Nair, chairman and managing director of Union Bank, said sees no reason why deposit rates should be raised at this point. "When you have positive return to the depositors, the deposit growth is expected to be higher. So to that extent there is no need why it should take place. Whether to pass on to borrowers or not is a call that we may have to take post policy because it gets linked to the deposit costs," he explained.

Majority of the economists and bankers say RBI's tone will continue to remain hawkish and inflation control will precede its policy stance. But there is a small group which believes the central bank will prepare the market for an exit from its tightening regime. This minority feels the regulator will give growth its importance, acknowledge global uncertainties and the possibilities of its negative spillover effects.