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RBI likely hike repo rate by 25 bps
March, 14th 2011

A sluggish industrial output growth and the feared fallout of the political turmoil in West Asia and North Africa and the devastating earthquake in Japan on the Indian economy are likely to play on the Reserve Bank of India?s mind while it continues with its ?struggle? to combat its chief prey ? inflation ? through hiking policy rates and curbing demand.

The central bank would most likely hike repo rate by 25 basis points at its forthcoming mid-quarter monetary policy review on March 17, a poll of economists, bankers, and bond dealers conducted by ET showed. One basis point is one-hundredth of a percentage point. Repo rate is the rate at which the RBI lends to banks against securities.

Last year was the most action-packed for the Indian financial market this decade in terms of policy actions. The RBI raised policy rates seven times since March 2010 with a hike of 175 basis points in repo rate and 225 basis points in reverse repo rate.

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.?

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 three-month low of 9.52% year-on-year. 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 March-end 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.

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