RESERVE BANK OF INDIA (RBI) INCREASE THE REPO RATE BY 25 BPS

Bangalore: The Reserve Bank of India hiked repo rates by 25 bps as expected by market experts. In its policy it indicated that the global economic situation has worsened and it has raised serious concerns. RBI added that the rise in petrol prices will have a direct effect on the WPI numbers.

Mr. Dipen Shah, Head-Fundamental Research, Kotak Securities said:

"The monetary policy is exactly in line with our expectations. The commentary is suggesting that, while the RBI has moderated its stance from the previous policy, it has not notified  that rate hikes will stop. The markets were volatile around this important, as always, but remained range bound and also maintained the gains of the previous couple of sessions.

Over the past few weeks, market remained largely Range limited   . Global  concerns and a lower — than — expected IIP number weighed on the markets. Our markets have outperformed the global peers in the past few trading sessions on hopes of peeking out of interest rate cycle and initiation of reforms. Efforts to stabilize the European economy also had a positive impact on sentiments.

Over the next few days, markets will continuously watch the developments in Europe and also in US, where the Federal Reserve meeting will be very important. Crude prices have remained buoyant, which is a point of concern. Any developments on the reforms front will be a positive for the markets. We continue to recommend a stock specific approach with a medium — to — long term perspective."

Though the RBI has raised interest rates 11 times since March 2010 to check the rate of price rise, inflation has remained much above the central bank's comfort level of 5-6 per cent and threatens to cross 10 per cent.RBI added in its policy statement that it would be  very difficult to stop this cycle at this point given the high inflationary pressures.

Experts were divided if another rate hike will have any bearing on inflation because of the upward revision in petrol prices - the third this year - effected on Thursday. Many have started questioning the efficacy of the series of the rate hikes. That's because despite 11 hikes in the last 18 months, inflation continues to be above the comfort levels of 5-6 per cent. Also another rate hike might slow down the economy which already saw a steep fall in its IIP numbers.Industrial growth, measured by the IIP, plunged to 21-month low of 3.3 per cent in July.

Finance minister Pranab Mukherjee said on Thursday that inflation may now have peaked and "we should see a gradual moderation in monthly headline inflation". But it doesn't look that considering fuel prices have been increased.

Experts hope that inflation and high commodity prices could ease in coming months as global growth concerns intensify and domestic demand moderates. The government expects the economy to grow by around 8.5% while the central bank has forecast near eight% growth for the fiscal year to March 2012.

The RBI expects inflation to moderate to 7.0% by March.

Posted in: Banking.