Analysts seemed to be mostly caught off guard by the Reserve Bank of India’s 0.50-percentage-point increase in its short-term lending rate. The lending, or repo rate, is now 8%, while its borrowing, or reverse repo rate, is now 7%. Here are edited excerpts of what some analysts said:
The RBI should have acted more aggressively six months ago. “Clearly the recent near 10% yoy WPI? [Wholesale Price Index] readings have put the RBI on alert mode. But signs of underlying demand pressures were quite clear about six months ago when in fact global uncertainties were slightly less than now and that’s when ideally the RBI should’ve hiked more aggressively. That could in turn have prevented the need for much higher interest rates. Given the lags with which interest rates work, these ‘extra’ rate hikes are likely to have their impact felt more on 2012 activity where we expect GDP growth anyway at a bottom-end of consensus 7.5%.” – Devika Mehndiratta, vice-president, emerging markets economic research, Credit Suisse
Growth is likely to suffer. “The 50 bps rate hike was above expectations. The more important point is the fact that there is no clear indication that the RBI is at the stage of pressing the pause button. I still feel that we are at the end of rate hike cycle and any further rate hike beyond 25-50 bps is going to impact growth significantly below the trend level.
While RBI rates are around the 8% levels the bank ‘base rates’ are in the range of 9.5-10.5%. The average lending rates (for working capital and term loans) to lower than AAA corporates are between 10.5-14%. At these high interest rate levels investment demand is surely expected to get impacted as incremental capex plans of corporates would be put on hold.” – Ramanathan K., chief investment officer, ING Investment Management Pvt. Ltd.
Indian corporations are looking overseas for credit. “Recently we have seen that corporates are moving to nonbanking resources for their credit needs, especially long-term with external commercial borrowings, as dollar-denominated borrowing now costs much less compared to high interest rates in India. The ratio of bank credit and non-bank credit now stands at 51:49 for the 1st quarter compared to 64:36 in the corresponding period [a year ago]. – D.K. Aggarwal, chairman, Sanlam Investments & Advisors
Still, the RBI should keep going. “We had argued in favor of a 50 bp hike (see for example our latest India Central Bank Watch), but we did not think that the RBI had the ‘guts’ to bring out the big guns. Thankfully, we were proven wrong. The more decisive move clearly demonstrates that inflation is the dominant concern, and that the RBI is not alarmed about the extent of moderation in the domestic economy…
The RBI sees upside risks to global commodity prices and points out that there is still an element of suppressed inflation in the economy despite the recent adjustment in domestic fuel prices, which, in themselves, will push up inflation. Moreover, the statement voiced some concerns that food inflation may not ease as much as expected given the spatial distribution of monsoon rains (as well as risks of below-normal rainfalls)…
While the 50 bp hike was an aggressive move, this is not the end of it. RBI is seriously concerned about anchoring inflation expectations and we expect that the policy (repo) rate will reach at least 8.25% this year. In this context, it’s also worth keeping in mind that a policy rate of around 8 is at best consistent with a neutral monetary policy stance. But, policy rates have to go higher than this to bring about a contractionary stance and, hence, the necessary slowdown in domestic demand. This is ultimately the policy stance that the RBI should strive for.”— Leif Lybecker Eskesen, chief economist for India & ASEAN, and Prithviraj Srinivas, economics associate, Hongkong and Shanghai Banking Corporation Ltd.
The RBI should have acted more aggressively six months ago. “Clearly the recent near 10% yoy WPI? [Wholesale Price Index] readings have put the RBI on alert mode. But signs of underlying demand pressures were quite clear about six months ago when in fact global uncertainties were slightly less than now and that’s when ideally the RBI should’ve hiked more aggressively. That could in turn have prevented the need for much higher interest rates. Given the lags with which interest rates work, these ‘extra’ rate hikes are likely to have their impact felt more on 2012 activity where we expect GDP growth anyway at a bottom-end of consensus 7.5%.” – Devika Mehndiratta, vice-president, emerging markets economic research, Credit Suisse
Growth is likely to suffer. “The 50 bps rate hike was above expectations. The more important point is the fact that there is no clear indication that the RBI is at the stage of pressing the pause button. I still feel that we are at the end of rate hike cycle and any further rate hike beyond 25-50 bps is going to impact growth significantly below the trend level.
While RBI rates are around the 8% levels the bank ‘base rates’ are in the range of 9.5-10.5%. The average lending rates (for working capital and term loans) to lower than AAA corporates are between 10.5-14%. At these high interest rate levels investment demand is surely expected to get impacted as incremental capex plans of corporates would be put on hold.” – Ramanathan K., chief investment officer, ING Investment Management Pvt. Ltd.
Indian corporations are looking overseas for credit. “Recently we have seen that corporates are moving to nonbanking resources for their credit needs, especially long-term with external commercial borrowings, as dollar-denominated borrowing now costs much less compared to high interest rates in India. The ratio of bank credit and non-bank credit now stands at 51:49 for the 1st quarter compared to 64:36 in the corresponding period [a year ago]. – D.K. Aggarwal, chairman, Sanlam Investments & Advisors
The RBI sees upside risks to global commodity prices and points out that there is still an element of suppressed inflation in the economy despite the recent adjustment in domestic fuel prices, which, in themselves, will push up inflation. Moreover, the statement voiced some concerns that food inflation may not ease as much as expected given the spatial distribution of monsoon rains (as well as risks of below-normal rainfalls)…
While the 50 bp hike was an aggressive move, this is not the end of it. RBI is seriously concerned about anchoring inflation expectations and we expect that the policy (repo) rate will reach at least 8.25% this year. In this context, it’s also worth keeping in mind that a policy rate of around 8 is at best consistent with a neutral monetary policy stance. But, policy rates have to go higher than this to bring about a contractionary stance and, hence, the necessary slowdown in domestic demand. This is ultimately the policy stance that the RBI should strive for.”— Leif Lybecker Eskesen, chief economist for India & ASEAN, and Prithviraj Srinivas, economics associate, Hongkong and Shanghai Banking Corporation Ltd.
