Inflation concerns are likely to weigh upon the central bank as it hikes key rates in its monetary review. The extent of the hike will indicate the government’s stance on recovery.
That a rate hike is imminent is quite a no-brainer. However, the Reserve Bank of India (RBI) may have to weigh its options carefully before effecting the rate hike through tomorrow’s quarterly monetary policy review.
The over-bearing concern is likely to be the burgeoning inflation eating into the pockets of consumers. The wholesale price index-based inflation is hovering around the 10% mark, while food inflation is again inching upwards, nearing 18%. This coupled with the commodity and fuel price rises are beginning to add to the inflationary pressures.
An analyst from Anand Rathi confirmed that RBI is likely to raise the rates on account of near double-digit inflation. “We anticipate up to 50 basis points increase in the repo and reverse-repo rates. Although the consensus is that RBI will raise CRR also, we don’t expect that to happen as yet. If the CRR is hiked, it would benefit banks with a higher low-cost deposit rate. But we feel that RBI will not make any significant move in this area.”
Sachchidanand Shukla, chief economist, Enam Securities, believes that RBI will raise repo and reverse–repo rates by 25 bps each in view of the rising inflation.
Until now, the other key concern of the central bank was whether the economic recovery has taken firm root—and whether a rate hike would impede the recovery process. Signs of recovery are getting more and more visible.
The index of industrial production (IIP), a key indicator of growth, has witnessed double-digit growth for the past three months. The government is also confident of achieving GDP growth of 8.5% in the current financial year. Also, with credit off-take rising past 16%, companies too seem to be optimistic about growth prospects and are accessing credit for their expansion plans.
But there are still some voices cautioning that the recovery has not yet fully set in. They argue that is too early to take the recovery for granted and that a sharp hike in interest rates at this juncture would dampen the speed of recovery. With companies only just beginning to return to the projects table, high interest rates may make such projects unviable for those companies.
Our source from Anand Rathi confirmed, “Our belief is that while economic recovery will continue, it will not be sufficiently strong. From that perspective, we do not expect more than a 50bps hike for the entire year. The growth is not strong enough for tightening of rates beyond this level.”
Sachchidanand Shukla believes that the economic recovery is sufficiently strong. “Economic recovery in India is strong enough to sustain a hike in policy rates. But if one looks at the global scenario, it is still not well-established.”
As such, the RBI will face the dilemma as to what extent the policy rates should be tinkered with. For every argument favouring a sharp hike, there is another demanding a more moderate stance from the central bank.
The RBI’s decision in this regard will be a clear demonstration of the government’s optimism, or lack thereof, about the on-going recovery process.
The government said an investigation was being conducted into the functioning of IPL but remained non-committal on a JPC probe
The Indian government on Monday said an investigation was being conducted into the functioning of Indian Premier League (IPL) but remained non-committal on a Joint Parliamentary Committee (JPC) probe demanded by opposition members who alleged that the tournament involved 'betting' and 'laundering of black money', reports PTI.
Finance minister Pranab Mukherjee told the Lok Sabha that investigation into the sources and routes of funding for the Twenty20 tournament had already begun and 'no guilty or wrong-doer' would be spared.
"The concerned department has already started the investigation process (into the IPL episode). All aspects including sources of funding and routes through which the funds arrived would be looked into. Appropriate action as per law would be taken. No guilty or wrong-doer will be spared," Mr Mukherjee said.
His response came after Left parties, BJP, RJD, SP, JD(U) and BSP alleged that IPL involved "betting" and "laundering of black money" and asked the government to take control of it.
They welcomed the step of prime minister Manmohan Singh to seek the resignation of minister Shashi Tharoor over IPL allegations.
As soon as the House met for the day, Lalu Prasad (RJD), Mulayam Singh Yadav (SP) and Sharad Yadav (JD-U) were on their feet demanding that the government ban the IPL which according to them has become a "betting and gambling ring".
Amid calls from Speaker Meira Kumar to allow the Question Hour, Sharad Yadav said, "The moot question is the IPL and not Tharoor." He was supported by Lalu Prasad.
Later during the Zero Hour, CPI leader Gurudas Dasgupta raised the issue. He said he welcomed prime minister Manmohan Singh's step of asking Mr Tharoor to resign, but the main issue related to IPL.
Alleging that the game involves "laundering of black money" and "white-washing of black money", he said it was an "aberration" taking place "under the nose of the finance ministry".
He criticised the 20-20 game format, saying it was a "caricature" of cricket which was sending a wrong message to budding cricketers.
"Players are bought like vegetables. Betting is taking place openly. It is not cricket but organised gamble," Mr Dasgupta alleged, adding that it involved huge amounts of money in a country which is poor in resources and has so many jobless people.
In the Rajya Sabha, the issue was raised by a JD(U) member who said funds of the IPL and BCCI should be confiscated.
Mr Dasgupta said there were reports that a large amount of money for IPL was coming from Mauritius and "dubious sources" in Dubai and black money in Swiss banks was being laundered into white money through this form of cricket.
He demanded that IPL should be banned and a JPC probe ordered to find out where the money is coming from.
Similar views were expressed by the deputy leader of the Opposition Gopinath Munde, Lalu Prasad, Mulayam Singh, Sharad Yadav and BSP's Dara Singh Chauhan. Mr Munde said IPL was a "scam" involving black money.
He said the prime minister had promised action in 100 days on illegal money stashed in foreign banks but these funds were being routed through IPL.
"The government should find the source of the money. There should be a probe to ascertain who runs (the show)," Mr Munde said. He also said that while bar girls in Mumbai had been barred from performing in bars, cheer girls are allowed to perform publicly.
Mr Prasad said while Mr Tharoor was just an excuse, a high-ranking official of the IPL had acquired assets like a plane abroad. The RJD chief thanked the prime minister for making Mr Tharoor resign and said the IPL should be banned and a JPC probe ordered. He also said that cricket should be nationalised.
Mulayam Singh said cricket, a "foreign game", was being promoted while national games were being neglected. Sharad Yadav alleged that IPL was "vulgar" and a "den of vices, black money and loot".
In the Rajya Sabha, the issue was raised by JD(U) member Shivanand Tiwari who said funds of the IPL and BCCI should be confiscated. "Players are being auctioned and the sport is being prostituted...," Mr Tiwari said.
Quoting media reports, he said income tax authorities are said to have found evidence including the use of black money and match-fixing in the last four years against IPL Commissioner Lalit Modi.
RBI said that the Indian economy exhibited a clear momentum in recovery in 2009-10, despite deficient monsoon and estimated GDP growth at 7.2% (in FY10), up from 6.7% in 2008-09
A Reserve Bank survey on Monday projected the economy to grow by a higher 8.2% in the current fiscal, while the central bank warned that exit from stimulus could mar growth unless carefully planned, reports PTI.
RBI expected wholesale prices-based inflation, which is near the double-digit region now, to moderate over the next few months but warned of upside risks owing to firming global commodity prices, particularly oil.
"It is important to guard against the risk of hardening of inflation expectations conditioned by near double-digit headline WPI inflation," the apex bank said in its report—Macroeconomic and Monetary Developments in 2009-10—that takes stock of the previous fiscal.
The bank is tomorrow slated to announce its annual monetary stance for the current fiscal and bankers expect it to hike key policy rates to control inflation.
RBI said that the Indian economy exhibited a clear momentum in recovery in 2009-10, despite deficient monsoon and estimated GDP growth at 7.2% (in FY10), up from 6.7% in 2008-09.
The Reserve Bank's Survey of Professional Forecasters suggested a median growth of 8.2% in 2010-11.
"The exit from fiscal stimulus and the growth supportive monetary policy, unless calibrated carefully, could impact the growth process," the Bank said.
The government has already begun roll-back of fiscal stimulus by partly restoring excise duty, while the RBI too has hardened its monetary stance by hiking key short-term lending and borrowing rates by 0.25 percentage points last month.