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Economists see another rate hike on cards

Economists see another rate hike on cards
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First Published: Tue, Mar 06 2007. 12 05 AM IST
Updated: Tue, Mar 06 2007. 12 05 AM IST
Opinion among economists and senior bankers is divided on the Reserve Bank of India’s (RBI) next move. While some are fairly certain that the central bank will go for a hike in its short-term policy rate and raise banks’ cash reserve ratio (CRR) as early as next month, others feel that it may wait to see the effect of its actions between December and now.
RBI last week announced a series of measures to stamp out liquidity from the system. They include issuance of government bonds and limiting the amount of money that commercial banks can park with the central bank daily. Banks park their surplus cash with RBI daily and earn 6% interest. These actions followed a 1% hike in CRR that removed Rs27,000 crore from the banking system between December 2006 and now, and four hikes in short-term policy rates since the beginning of 2006-06 fiscal.
“RBI will further tighten its policy. I do not rule out a hike in short-term rate and/or CRR in April when the Indian central bank announces it annual monetary policy. It can do it even before that,” says Omkar Goswami of CERG Advisory Pvt. Ltd, an economic research firm. Goswami says he is seeing the first signs of growth choking.
“It will be difficult to maintain 9% growth in gross domestic products. I can bet, it will be at least 1% less,” he says. According to him, the rise in inflation is a supply-side issue and it may come down but not to the level of 5.5% that RBI has been projecting.
The CEO of a private bank who didn’t want to be named, endorses Goswami’s views and says rates will rise in the coming days as RBI will not let loose “its grip on liquidity”.
Ajit Ranade, chief economist of the Aditya Birla group, however, feels RBI will not go for the “overkill”. Admitting that the inflation is a “big issue”, Ranade says RBI has taken steps and talked tough but it may wait awhile now to see the effects (of its actions). “The hawkish stance will continue but I do not see RBI jumping into any action now. We need to wait to see the impact of the CRR hike,” he says.
Saumitra Chaudhuri, economic advisor and research coordinator of Icra Ltd, an associate of Moody’s Investors Service, also feels RBI will maintain the tight money stance till mid-2007 and may refrain from fresh actions if it sees the desired effect. “The price of liquidity has gone up but the quantum of liquidity is still huge in the system. This is because of heavy dollar-buying by RBI. The central bank will continue to soak up liquidity from the system and may take a call on further action later if does see things are not going the way it wants.”
According to Chaudhuri, the “correction” in the equity market has been “inevitable”. “In May 2006, the market had a melt-down as it moved ahead of the fundamentals but the recovery was much quicker than expected. The accelerated recovery had the seeds of another correction as the risk was not conveyed. We are seeing that correction now,” he says.
Chaudhuri says this will make global central bankers’ job less unpleasant as the erosion of market wealth will help manage the aggregate demand, which the central banks have been trying to tackle through raising rates and tightening liquidity.
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First Published: Tue, Mar 06 2007. 12 05 AM IST