RBI rate hikes to slow growth: banks

RBI rate hikes to slow growth: banks

Mumbai: India’s growth will cool off to 8.1% in 2011 from 9.1% in 2010 as the Reserve Bank of India (RBI) hikes interest rates by 1.25 percentage points to fight inflation this year, Hong Kong and Shanghai Banking Corp. Ltd (HSBC) said in an Asian conference call on Monday.

Research notes from Citigroup and Standard Chartered Bank Plc also predicted more rate hikes as RBI prepares to tackle rising inflation.

Fred Neumann, managing director and co-head of Asian economics research at HSBC, said inflation is the “number one concern" for India, immediately hurting growth.

He expects the Reserve Bank to hike the repo rate to 7.5% by end December from 6.25% currently.

Samiran Chakraborty, regional head of research, India, Standard Chartered, said Wholesale Price Inflation (WPI) for December 2010 will bounce back.

“We have raised our December inflation forecast from 7% to 8.30% year-on-year, versus the November figure of 7.48%, on an unexpected reversal in the seasonal pattern of food prices. This upward deviation from earlier projected levels will change the forecast inflation trajectory for the next few quarters, and thus the course of monetary action," Chakraborty said.

Chakraborty expects inflation to be in the 6.5% to 7% range by March, above the central bank’s stated comfort level of 5.5%.

Standard Chartered expects two interest rate hikes of 25 basis points (bps) each in January and March and a total of 75 bps hike in the repo and reverse repo rates (currently at 6.25% and 5.25%, respectively) in calendar year 2011, with the possibility of further hikes if inflation is more stubborn than expected.

One basis point is one hundredth of a percentage point.

Chakraborty acknowledged downside risks to growth.

“India is on a razor’s edge with risk to growth on the downside and inflation on the upside. We have hit a soft patch on growth and more rate hikes could hurt," he said in an interview, adding that the bank will revise its growth forecasts towards the end of March.

Standard Chartered expects India to grow at 8.5% in 2010-11 and 8.8% in 2011-12.

In another note, also on Monday, Citigroup India economist Rohini Malkani forecast that WPI would be 8.4% in December from 7.5% in November.

“While the base effect could help, the rise in primary products as well as commodity prices poses upside risk to our March 2011 estimate of inflation decelerating to 6.5%. We expect the Reserve bank to hike rates on 25 January," she said.