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Governor says there is need to persevere with anti-inflationary stance. Bond yields sharply up, while stocks drop
The Reserve Bank of India (RBI) today raised interest rates by a higher-than-expected 50 basis points, indicating the seriousness of the fight against high inflation, despite slowing growth.
The central bank said it was increasing the repo rate at which it lends to banks to 8% from the previous 7.5%, and the reverse repo rate, to 7% from 6.5%. This is more than the 25 basis points increase that the market was expecting. However, the cash reserve ratio (CRR) has been left unchanged at 6%.
The indices slid immediately after the announcement with the BSE Sensex down by over 300 points (or 1.5%) and the S&P CNX Nifty losing nearly 100 points (or about 1.7%).
This is the 11th rate increase by the RBI since March 2010, which is seen as the most aggressive among central banks in fighting inflation.
"RBI continues to maintain its hawkish stance towards inflation and only signs of sustainable downturn in inflation would result in change in RBI's stance, which indicates that pause in rate hikes is not in sight and will clearly depend on the inflation trajectory," opined Abhijit Majumder, senior research analyst-institutional equities, Prabhudas Lilladher.
The wholesale price index inflation was at 9.44% in June, more than double the RBI's comfort level, and the fear is that high prices could persist through the end of the year.
The RBI also revised upwards its outlook for wholesale inflation for the current year to March 2012 to 7% from the earlier 6%.
RBI governor D Subbarao said in his policy review statement, "Considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance."
But the central bank stuck with its forecast for economic growth in the current year at around 8%, saying that while some interest-rate sensitive sectors have shown signs of moderating, "there is no evidence of a sharp or broad-based slowdown as yet".
"RBI's announcement of 50 basis points increase in repo rate comes as a major disappointment to the industry. With the growth momentum already under pressure, this move will further hurt the future prospects. Even the projected growth rate of 8% for the year 2011-12 now looks difficult to achieve" said Dr Rajiv Kumar, secretary general, FICCI.
Analysts widely expected the RBI to raise rates by about 25 basis points, while some believed there would be a pause in the tightening cycle due to signs of slowing growth and global uncertainty. Latest industrial output and manufacturing numbers were the worst in nine months and January-March quarter growth was a worse-than-expected 7.8%.
"The RBI's action to raise policy rate by 50 bps against market expectation of 25 bps in part reflects its desire to send a strong anti-inflationary message to market participants and in part reflects front loading of rate hikes. We expect another 25 bps rate hike and a pause thereafter to gauge the evolving growth-inflationary dynamic; however, policy easing is not on the cards yet. While, inflation will ease in the second half of the fiscal, in part due to base effect, full year inflation will average over 8%. While there have been signs of growth decelerating, we do not expect an abrupt deceleration in growth. We maintain our full year FY11-12 GDP growth estimate of 7.6%, down from 8.5% in FY10-11," Ashutosh Datar economist at IIFL said while commenting on the RBI's rate hike.
The RBI governor said today's measures are expected to "maintain the credibility of the commitment of monetary policy to controlling inflation". They will also "reinforce the point that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required."
Hike is higher than was expected; market drops over 1% on the announcement
The Reserve Bank of India (RBI) today raised key rates by a steep 50 basis points. (bps). Following this, the repo rate has gone up to 8% from the earlier 7.5% and the reverse repo rate to 7% from 6.5%. The central bank, however, kept the cash reserve ratio (CRR) rate unchanged at 6%. This is the 11th time since March 2010 that the RBI has hiked interest rates in a bid to tame inflation.
Despite the economy showing signs of cooling down, Wholesale price inflation (WPI) in June rose to an annual 9.44% from 9.06% in May, driven by higher prices lf fuel and manufactured goods. Finance minister Pranab Mukherjee recently maintained that inflation would continue to remain high till December.
Stating that the monsoon, global commodity prices and the Eurozone crisis have the potential to alter growth path and inflation level, the RBI said, "A significant departure of monsoon from 'normal', a collapse of global commodity price bubble and Eurozone debt crisis assuming full-blown proportion" can alter both growth as well as inflation forecasts.
The central bank, however, retained its economic growth forecast for the current fiscal at around 8%. A report by RBI-sponsored professional forecasters, however, scaled down GDP growth to 7.9% from earlier projection of 8.2%.
Pranab Mukherjee expects inflationary pressures to continue due to higher fuel prices
New Delhi: While the food and fuel inflation figures announced today have shown signs of easing, union finance minister Pranab Mukherjee has said that inflationary pressures are likely to continue due to the increase in rates of petroleum products a fortnight ago.
"There is inflationary pressure in the system and these weekly variations (in food inflation numbers) are mainly because of the base effect," Mr Mukherjee said.
He said the overall inflation in June could see some upward movement, from the 9.06% recorded in May, mainly on account of the fuel price hike announced on 24th June, PTI reports.
The 7.61% rise in prices of food items for the week ended 25th June is the lowest since the week ended 7th May when food inflation was at 7.47%.
On a weekly basis the index on fuel and power rose to 166.3 points from 160.2 points in the previous week. Overall fuel and power inflation stood at 12.67%.
"This six points increase is mainly because of enhancement of prices of diesel, kerosene and LPG. That has its impact," Mr Mukherjee said.
While experts said the softening of price rise is likely to continue as the monsoon progresses, the price rise of fuel could affect the overall trend.
They also said that the fuel price hike may spill over into the food segment in the form of higher transportation costs for grains and other crops.