By Geetanjali Kedia RBI’s monetary policy review scheduled for Tuesday, January 25, has hopes rested for a hike in key policy rates, to control spiraling inflation, especially food inflation. A moderation in IIP growth to 2.7% for November 2010 will also be on Duvvuri Subbarao’s mind, while announcing the policy. A 25 basis points (bps) or 0.25% hike, contrary to general market speculation of 50 bps (half a percentage), should suffice. Inflation and GDP growth, although move hand-in-hand, are poles apart. A higher GDP growth fuels inflation, whereas high inflation levels make growth that difficult to achieve, by making investments dearer. Hence, RBI will have to walk the middle path. If too much emphasis is laid on economic growth, inflation goes through the roof, as was seen in October 2010 when inflation inched to 9.12%. A bigger worry, food inflation, which is giving the regulator sleepless nights, had peaked to 18.32% in last-week December, 2010, before cooling off to 15.52% for second week of January 2011, which is still high and concerning. High food inflation is however, more on account of supply side constraints than liquidity issues. It is important to re-call that most of the banks have raised both, their deposit rates and base rates / BPLR in the quarter gone by. This has led to channelization of savings in the form of term deposits, as a means to counter inflation. However, these retail funds are not enough to satisfy the rising liquidity appetite of corporate India. RBI needs to keep the liquidity tap flowing, because growth is no longer at the pace it used to be.
If 0.50% hike is announced in interest rates, liquidity will get dried-up, thus making the 8.5%+ GDP growth for FY11 a distant dream. The street expects RBI to avoid a tough monetary stance and limit a rate increase to 25 bps, to ensure economic growth is not squeezed by its fight to rein in inflation. So, we are banking more on 25 bps hike in repo and reverse repo rates. What about you? |
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