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RBI can afford to be less hawkish: Barclays Capital

RBI can afford to be less hawkish: Barclays Capital
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First Published: Fri, Aug 20 2010. 01 03 PM IST
Updated: Fri, Aug 20 2010. 01 03 PM IST
Mumbai: The Reserve Bank of India (RBI) will probably pause after raising interest rates for a fifth time this year in September, signalling a less hawkish stance as inflation pressures begin to ease, an economist at Barclays Capital said.
The RBI has increased its main lending rate by 100 basis points since mid-March to rein in high inflation, especially in manufactured items that has been driven by capacity constraints in a robustly growing economy.
The tightening policy has cooled headline annual inflation to just under 10% in July, after stubbornly staying in double-digits for five months.
“The RBI is no longer behind the curve as far as managing inflation or inflation expectation is concerned,” Rahul Bajoria, regional economist at Barclays Capital, said in an interview.
“So from that perspective I think the RBI can possibly afford to be slightly less hawkish from here on.”
Rising rates have also weighed on factory output, which rose at its slowest pace in 13 months in June at 7.1% from a year earlier. Exports grew an annual 30% in June, slower than 35% rise in May.
Still, the central bank has forecast the economy will expand 8.5% in 2010-11 from 7.4% last year and the fastest pace among major economies after China.
Bajoria reiterated the bank’s forecast for another 25 basis points increase in key rates by the RBI when it reviews policy on 16 September, saying the central bank will remain focused on inflation management in the near term.
Many analysts have scaled down their forecast for rate hikes in the remaining months of the fiscal year ending in March, and the 5-year overnight indexed swap has dropped 37 basis points from a 22-month high of 7.41% hit on 5 August.
Case For Pause
“The reason why I think they are likely to pause beyond September is simply that the situation is going to turn around in 3-6 months, not in the near term,” Bajoria said. He expects headline inflation will ease to 5% by next March, more optimistic than the central bank’s forecast of 6%. He also sees factory output in single digits in the next three months.
“Risks to growth and inflation are much more balanced now than it appeared a month back at the July credit policy,” Bajoria said, adding that while inflation pressures are likely to ease, industrial output growth may also remain moderate.
“Momentum of non-food manufacturing inflation ... appears to be broken now. We have seen two months of sequential decline in non-food manufacturing index itself,” he said.
Bajoria said the RBI would keep money supply on a tight leash, while foreign equity investments could ease due to expensive stocks but would still be comfortable at $4 billion to $5 billion a quarter.
“Liquidity going forward is going to be tight and that’s what the RBI wants as a policy, but it will not be tight enough to constrain credit growth,” he said.
Government spending will accelerate from October when the festive season begins in India, and this should prevent liquidity from tightening sharply, he said.
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First Published: Fri, Aug 20 2010. 01 03 PM IST