'Reddy' for another hike?
When the Reserve Bank of India reviews its monetary policy on October 31, will it raise the interest rates once again or will it wait and watch, giving the previous hikes more time to work? The central bank has raised the reverse repo rate three times this year by quarter percentage point each to 6 percent, to curb inflationary expectations stoked by strong economic growth.
The inflation has mostly remained within the RBI's comfort zone of 5-5.50 percent. But of late, it has started edging towards the higher end of the range. The latest data has shown the annual inflation measured by Wholesale Price Index at a four month high. The inflation for the week ended October 14 was at 5.26 percent - up from the previous week's figure of 5.16 percent, on account of higher prices for food, edible oils and textiles. Going ahead, the inflation numbers are expected to return higher readings because of low base effect and may inch up to 6%.
As the strong growth momentum keeps an upward pressure on inflation, RBI may have to do a bit more monetary tightening. Bond markets have been generally sanguine in the past couple of months. Yield on the 10 year benchmark government bond has fallen three quarters of a percentage point after touching an almost five-year high of 8.4 percent in July. This optimism may be misplaced. RBI may go in for a pre-emptive hike now rather than waiting for the next review when inflation may have gone beyond the March-end target of 5-5.50 percent. Even if RBI decides not to change the rates now, the tightening cycle is far from over.
Besides domestic growth considerations and inflationary expectations, RBI will also have to weigh the global scenario – US rates being on hold amid economic slowdown, strong growth and continued tightening bias in Euro-zone economies, sustained expansion in Japan and possible rate actions.
When the Reserve Bank of India reviews its monetary policy on October 31, will it raise the interest rates once again or will it wait and watch, giving the previous hikes more time to work? The central bank has raised the reverse repo rate three times this year by quarter percentage point each to 6 percent, to curb inflationary expectations stoked by strong economic growth.
The inflation has mostly remained within the RBI's comfort zone of 5-5.50 percent. But of late, it has started edging towards the higher end of the range. The latest data has shown the annual inflation measured by Wholesale Price Index at a four month high. The inflation for the week ended October 14 was at 5.26 percent - up from the previous week's figure of 5.16 percent, on account of higher prices for food, edible oils and textiles. Going ahead, the inflation numbers are expected to return higher readings because of low base effect and may inch up to 6%.
As the strong growth momentum keeps an upward pressure on inflation, RBI may have to do a bit more monetary tightening. Bond markets have been generally sanguine in the past couple of months. Yield on the 10 year benchmark government bond has fallen three quarters of a percentage point after touching an almost five-year high of 8.4 percent in July. This optimism may be misplaced. RBI may go in for a pre-emptive hike now rather than waiting for the next review when inflation may have gone beyond the March-end target of 5-5.50 percent. Even if RBI decides not to change the rates now, the tightening cycle is far from over.
Besides domestic growth considerations and inflationary expectations, RBI will also have to weigh the global scenario – US rates being on hold amid economic slowdown, strong growth and continued tightening bias in Euro-zone economies, sustained expansion in Japan and possible rate actions.
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