News: RBI may further hike interest rates

(BL 30/07/2006) New Delhi - Tightening monetary policies around the world coupled with surging global oil prices due to geo-political situation will continue to put pressure on interest rates in India with analysts expecting RBI to further hike short-term rates in its future reviews this fiscal.

Last week RBI announced the first quarter credit policy Review for 2006-07 and driven by the global pressures from surging oil prices and hardening interest rates, the Central Bank hiked the key interest rates at which banks park their short-term funds with Reserve Bank and vice versa, called Reverse Repo and Repo--by 25 basis points.

The overall macroeconomic and geopolitical global environment is admittedly indicative of marked downside risks, which prompted RBI to hike reverse repo rate to six per cent and repo rates to seven per cent, global equity research firm Mogan Stanley said.

"We believe that the RBI is likely to make two more rate hikes of 25 basis point each over the next six months in line with the 50 basis point hike in the US Fed rate as expected by our US economics team," Morgan Stanley said and maintains that current global financial markets conditions and concerns on runaway credit growth are key drivers in influencing RBI's decision.

However, DSP Merrill Lynch Managing Director and head of Global Markets & Investment Banking Amit Chandra told PTI, "We expect rates to remain unchanged. However, risks come from any unforeseen global developments."

The RBI stance is in line with the its global peers as a host of central banks, including US Federal Reserve, European Central Bank and Bank of Japan, have raised their interest rates from the unusually low levels that they had reached earlier in the decade. Jammu & Kashmir Bank Chairman and CEO Haseeb Drabu said that another hike of 50-75 basis points was likely in the next 12-15 months.

With the global interest rates continuing to move up and the risk reduction trade underway, the RBI needs to keep taking rates higher to avoid a disruptive rate rise at a later date, Morgan Stanley said.

The first quarterly review of the 2006-07 monetary policy said much more attention will be given to global factors now than before.

Announcing the policy, RBI Governor Y V Reddy said the average international price of the Indian crude basket increased from $ 60.1 per barrel in January-March, 2006 to $ 67.3 per barrel in April-June, 2006 and further to $ 71.4 per barrel in July 2006 (up to July 21).

The RBI Governor said fuel prices, which account for about 35 per cent of the increase in WPI, constitute a major risk to headline inflation.

Domestic prices of petrol and diesel on average were increased by nearly 9.0 per cent and 6.5 per cent, respectively, in early June. However, international crude oil prices continue to be volatile and rising.

Leading brokerage firm Karvy said that increase in short-term rates would tame inflation risk caused by upward trend in Indian crude oil basket price and double digit growth (of 10.9 per cent) in manufacturing sector during April-May 2006.