Dr Arun Singh, Senior Economist, Dun & Bradstreet India shares his view with Krishna Merchant on the impact of RBI rate hike action.


Was the rate hike in reverse repo of 50 bps and Repo rate by 25 bps in line with expectation or was it more hawkish?

In view of persistent inflationary pressures in the economy, D&B had expected a 25 bps hike in the repo rate in the first quarter review of the monetary policy.

Nonetheless, the 50 bps hike in the reverse repo rate is above expectations. The hike in reverse repo rate by the RBI is aimed towards narrowing the LAF corridor, which in turn is expected to reduce volatility in the call money market.

Given the current liquidity shortage which is likely to be temporary, the immediate impact of hike in the reverse repo rate is likely to be limited. However, it will help in absorbing excess liquidity from the banking system once the liquidity conditions improve.

Do you think RBI is behind the curve in hiking rate this time as Inflation touched 10.55% although economy grew 8.5% in the last quarter?

The changes in the policy rates by the RBI have been attuned to the evolving macroeconomic conditions in the domestic as well as external economies. Given the task of containing inflationary expectations and maintain the growth momentum in the recovery phase, the policy actions have maintained a fine balance so far.

The RBI has gradually shifted the monetary stance to containing inflationary expectations given that the initial rise in inflation was mainly driven by the supply side constrains. The 50 bps hike in repo rate and 75 bps hike in the reverse repo rate in a span of a month indicates that containing inflationary expectations is at the forefront of the RBI’s policy agenda.

What will be the impact on banks credit growth as car loans, home loans are expected to get costlier?

With the hike in the policy interest rates, lending rates are expected to increase going forward. This will certainly have some impact on the demand for car loans and home loans.

However, these sectors might receive some respite going forward as the domestic demand conditions improve thereby adding to the overall growth in bank credit. Further, given buoyancy in industrial activity, impact of rate hike on bank credit is expected to be limited.

Already there is a liquidity crunch due to payment towards advance tax and 3G. Will a rate hike at this juncture be a dampener for the economy?

Given that there is some shortage of liquidity due to cash outflow for advance tax payment and 3G spectrum, the RBI has kept CRR unchanged in its first quarter policy review. Further, though the rise in lending rates of SCBs following the hike in policy interest rates is expected to contain demand side pressures in the domestic economy, investment is unlikely to be impacted.

What is your outlook on the benchmark 10-year bond yield?

With the hike in policy interest rates, the 10-year bond yield is expected to remain range bound with upside bias.