Economists see 25bps tightening on Tuesday

Economists see 25bps tightening on Tuesday

Mumbai: Leading economists opine that the Reserve Bank will not venture to tighten the key policy tools beyond 0.25% on Tuesday, considering the poor credit offtake, losing growth momentum and the emerging global situation.

The Reserve Bank will be announcing the second quarter monetary policy, which is the busy season policy on 2 November. And the bankers, the markets as well as the industry are resigned for a 0.25% spike in short-term lending or repo rate and borrowing reverse repo rate.

So far this year, RBI has spiked these rates as much as 1.25% in five consecutive instalments and one hike in the banks’ mandatory cash reserves or cash reserve ratio (CRR).

As recent as on 16 September, it had increased the repo and reverse repo rates by 0.25 and 0.50% to 6 and 5% respectively to tame inflation, while left the CRR, bank rate unchanged at 6% each and the statutory liquidity ratio too at 25%.

While the central bank’s prime concern is to batten down the stubbornly high inflation pressures, these economists argue that RBI will not be oblivious of the three key main issues before it-the ebbing growth trends, poor credit offtake and the uncomfortably high inflation.

Headline inflation stood at 8.6% in August, while food inflation is at a further elevated 13.75% for the week ended 16 October.

Another main concern is the tight liquidity situation prevailing now following the massive 15,500 crore Coal India public float last week and the high festive spending by consumers as they prepare for the Diwali in the later part of next week.

The very tight situation also had the call money rates hitting historic highs and CPs touching 20-year highs last week.

In fact, the liquidity situation was so bad the RBI opened a second LAF (liquidity adjust facility) window On Saturday and brought down the SLR by 1% to 24 per cent for two days. And on Saturday the banks borrowed a whopping 1.31 lakh crore from the central bank.

Leading global financial services firm E&Y India national leader for global financial services Ashvin Parekh is of the firm opinion that the Reserve Bank governor Duvvuri Subbarao will only go in for 25 basis points--one basis point is one hundredth of a per cent-hike in the key policy rates to six and five per cent respectively; and that the CRR will be left unchanged at the current 6%.

“It (the policy action) will be a 25 bps hike. I believe so primarily on two counts: for the past two months, credit offtake has been very poor. Therefore, another hike will force corporates to look at the corporate bonds maker to raise money or other sources.

“Secondly, the latest IIP numbers and core sector growth rates have been very discouraging. But having said so, the Governor will respond to another to respond to the high inflation; hence a 25 bps spike is on the way," argues Parekh.