With WPI over 6%, rate cut unlikely

Experts believe that with existing inflationary pressures, the RBI governor is likely to hike the repo rate in the upcoming monetary policy review on October 29

GN Bureau | October 15, 2013



Looks like Reserve Bank of India (RBI) governor Raghuram Rhajan will have to wait longer before he can give in to popular demand of easing up interest rates thanks to persistent inflationary pressures. With the rise in the wholesale price index (WPI) based inflation last month to 6.46 percent, the highest in seven months, experts expect Rajan to maintain a hawkish stance and hike the interest rate.

In the second quarter monetary policy review to be announced on October 29, experts have pegged a repo rate hike by 25 basis points. Repo rate is the rate at which banks borrow from the RBI and this impacts the interest rates charged on loans to consumers.

The increase in the WPI inflation from 6.1 percent in August to 6.46 in September, mainly due to high food prices, has put greater pressure on the RBI to further tighten liquidity in the economy.

In his debut monetary policy review last month, Rajan had raised the repo rate by 25 basis points to 7.5 percent.

While experts are pretty sure of an in interest rate hike, India Inc is hopeful that Rajan will keep the poor investor sentiment in mind and go in for a rate cut despite high inflation.

"The increase in inflation to a seven month high is a cause for concern especially as the economy is in the midst of investment led slowdown and there are no major signs of a turnaround in industrial activity in the country," said Chandrajit Banerjee, director general, CII.

He further said, "The revival of inflation, especially that of food prices, calls for urgent steps to address supply side bottlenecks in agriculture. Besides, the rise in inflation should not come in the way of the forthcoming policy of monetary easing by the RBI as the arrival of kharif crop in October would provide some relief in food prices, going forward. Moreover, it is of utmost importance to shore up flagging investor sentiment which has been adversely affected by high interest rates."
 

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