RBI Seen Raising Repo Rate by 25 Bps

Struggles to balance inflation and IIP slump as fallout of W Asia & Japan quake looms

The Reserve Bank of India, or the RBI, is on course to raise a key policy rate by a quarter percentage point, or 25 basis points, for the eighth straight time at its monetary policy review this week to combat inflation, a poll of bankers, bond dealers and economists conducted by ET shows.
Besides high inflation, sluggish industrial output growth and fears of a fallout of the political unrest in the Middle East and North Africa and its impact on oil prices are likely to weigh on the Reserve Bank of India's mind as it struggles to manage the growth-inflation trade off.
Economists, bankers, and bond dealers whom ET spoke to said that the central bank will raise the repo rate — the rate at which it lends to banks against securities — by 25 basis points. One basis point is onehundredth of a percentage point.
The RBI has raised policy rates seven times since March 2010 — a 175 basis points hike in repo rate and 225 basis points hike in the reverse repo rate, the rate at which it absorbs excess liquidity from banks.
Admitting that the central bank is struggling in its dual objective of taming inflation and promoting growth, Governor D Subbarao had recently said, "For inflation management we have to raise policy interest rates. For protecting, promoting, and preserving recovery we need to keep interest rates low, so there is tension between raising policy interest rates and keeping them low." More Rate Actions Likely
Indicating more rate actions from the RBI, the finance ministry's Chief Economic Advisor Kaushik Basu said policy initiatives to bring down inflation will continue a couple of months into the new fiscal year. Government data released last week showed food inflation for the week to February 26 slowed to a threemonth low of 9.52% year-onyear. This compares with a 10.39% increase in the previous week. Annual headline inflation in January was at 8.23%, well above the RBI's perceived comfort zone of 4-5% and compared with its Marchend target of 7%. Government data due on March 14 is expected to show February headline inflation to have moderated to around 7.8%.
However, some, such as State Bank of India, don't see any rate action from the RBI at its mid-quarter review and expect it to be a non-event. "Inflation is coming down and industrial production is slow. Rising oil prices and the crisis in Japan — all these factors might affect our growth in some way. So we don't expect any changes in interest rates this time. Even if there is a 25-bps rate hike, it will not substantially affect the secondary interest rates," said Anjan Barua, deputy managing director & group executive (global markets), State Bank of India. India's Index of Industrial Production rose 3.7% in January, marginally higher than the 2.53% rise a month earlier, which many experts feel may not be adequate to meet the 8.6% GDP growth target for the fiscal year-end. Raising concerns that domestic demand growth is likely to slow, brokerages such as Citi and Morgan Stanley recently scaled down their GDP growth forecast for India to 8.4% and 7.7%, respectively, for the next fiscal year. In comparison, the government in its Budget last month said the economy is expected to grow at 9%, plus or minus 0.25%, in 2011-12.