First, there was surprise. Now, there is intense debate.
The analysts’ community is deeply divided on the next move of the Indian central bank when it announces the country’s annual monetary policy for the fiscal year 2009.
Meanwhile, the Reserve Bank of India (RBI) on Thursday raised banks’ cash reserve ratio (CRR), or the amount of cash that banks keep with the central bank, by half a percentage point to 8% in two stages.
So, what will it do on 29 April when the bank sets out the agenda for the monetary policy?
Lehman Brothers’ economist Sonal Verma does not expect another CRR hike next week. According to her, RBI will leave its policy rates unchanged.
Rajeev Malik of the Asia economic research wing of JPMorgan Chase Bank in Singapore is also of the same opinion. “We do not expect a rate hike at the 29 April meeting. Growth is already moderating, and RBI will likely play it safe by not pressing the rate hike button,” he says.
However, others such as Goldman Sachs and HSBC feel that RBI is not yet through with its monetary tightening measures and it will go for a rate hike next week.
“We think that RBI will go for a 25 basis points increase in repo rate. (One basis point is one hundredth of a percentage point). The guiding principle would be to arrest inflationary expectations and further slow demand,” said a Goldman Sachs’ economic research report, released on Thursday night after the announcement of the CRR hike. Tushar Poddar and Pranjul Bhandari are the authors of this report.
The Indian central bank has two policy rates—the repo rate, or the rate at which RBI injects liquidity in the system, and the reverse repo rate, or the rate at which the central bank sucks out liquidity. The repo rate is currently pegged at 6% and the reverse repo rate at 7.75%. The last time RBI raised its reverse repo rate was in March 2007 while the repo rate was last raised in July 2006.
Robert Prior-Wandesforde of the Indian economics team at HSBC, too, predicts RBI will go for a rate hike. “...further monetary tightening measures certainly cannot be ruled out if our inflation analysis is anywhere near correct. Indeed, this could happen as early as the 29 April meeting, when discussions will centre on whether the CRR hike should be backed up by a repo rate increase. Given the level of inflationary concern, this seems more likely than not and we have pencilled in a 25 basis points increase,” the HSBC economist says in a report released on Friday.
HSBC’s inflation analysis suggests that even on unchanged oil and international food commodity price assumptions, the Wholesale Price Index (WPI)-based inflation rate is heading to 8% in the not-too-distant future and may remain in the range of 7-8% for many months, barring aggressive fiscal and administrative measures by the government. The WPI rate is also at risk of reaching double-digit territory if international commodity prices continue to surge, HSBC says.
Monetary tightening, according to the British bank, is more likely to have bigger depressing effects on growth than inflation.
Varma of Lehman Brothers also says “a repo rate hike will amount to an overkill in the economy”. According to her, much of the current inflation surge is supply side-led and is a reflection of the surging prices of global food, fuels and metals, on which policy tightening does not have an effect. Lehman Brothers expects the growth in India’s gross domestic products (GDP) to slow down from 8.7% in 2008 to 7.6% in 2009.
The JPMorgan forecast is that inflation will remain in the 7-7.3% range over the next two-three months and agricultural harvest will be key in deciding how quickly inflation can come off. From RBI, it expects a hawkish statement that won’t rule the possibility of further action, if needed.
Malik of JPMorgan says policy rates will remain unchanged for the remainder of 2008, but another hike in CRR cannot be totally ruled out.