RBI to raise key rates by 25 bps on January 25: Poll
Analysts expect the Reserve Bank of India (RBI) to raise key rates by only 25 basis points on January 25 despite sticky inflation, as a slump in industrial production growth suggests some risks to economic momentum still exist.
January 19, 2011 / 17:57 IST
Analysts expect the Reserve Bank of India (RBI) to raise key rates by only 25 basis points on January 25 despite sticky inflation, as a slump in industrial production growth suggests some risks to economic momentum still exist.
Median forecasts from 20 economists suggested the central bank is likely to raise both its key rates by 25 basis points on January 25, unchanged from expectations at a similar poll conducted earlier this month. "This is the best that they might be able to afford now. There should not be more aggressive tightening given that growth is to an extent slowing," said Indranil Pan, chief economist at Kotak Mahindra Bank.India's annual industrial output in November grew at its slowest in 18 months but headline inflation in December accelerated on costlier food items, cementing expectations for a rate increase, and several economists polled said the central bank should act more aggressively to tame inflation. The RBI will also take note of the PMI reading for December, which showed a slowdown in India's services and manufacturing sectors. "Inflation in next month should be back close to 7.5%, but thereafter could stay sticky. That itself is not comforting. Risk is, if oil and other global commodity prices tend to jump up suddenly, but we do not feel they would," Kotak's Pan said.Of 20 economists surveyed, 18 expect the RBI to increase rates by 25 basis points on January 25, while one expects a 50 basis point increase. One expects no change."January policy may see selective hikes in provisioning and risk weights for some sectors exhibiting very high credit growth. RBI may like to pause till mid-quarter review in March, as presently credit market rates are already responding on the upside," said Nitesh Ranjan, economist at Union Bank of India.The RBI's key lending rate, the repo rate , currently at 6.25%, is seen rising to 6.5% next week and to 7% by the end of 2011, the poll found.The reverse repo rate , or borrowing rate, which stands at 5.25%, is seen rising to 5.5% on January 25 and to 6% by the end of December.India's economy, Asia's third-largest, is growing at more than 8.5%, the fastest pace among major Asian economies after China.The RBI, which has raised its key lending rate by 150 basis points in six moves in 2010, was expected to pause in its tightening cycle at least until February, but those expectations have changed in recent weeks.While most said the tightening in recent months was appropriate, five out of 17 said the central bank needs to be more aggresssive while none said it needs to be less aggressive. Last month, only one analyst called for a more aggressive stance while one had said the RBI should be less aggressive. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
