RBI likely to hike rates on Tuesday

A rate hike by the Reserve Bank of India on Tuesday seems a foregone conclusion. However, it may not lead to a immediate jump in deposit and lending rates of banks.

India’s central banker has already hiked key policy rates three times this year, but banks have held firm so far. With soaring inflation, RBI too is expected to act. In such a scenario it would be a good time for borrowers of home or auto loan to still go in for loans.

The July quarter monetary policy, to be announced on Tuesday, comes at a time of high inflation — which has topped 10 per cent for five months in a row. In fact, this is the longest spell of such inflation since the mid-90s, say some economists.

The RBI is under pressure from the government not to tinker too much with the policy rates that may effect growth.

The considered view of most economists and bankers is that it may only increase the repo and reverse repo rates by a quarter per cent. For instance Mr Ramit Bhasin, of RBS says the RBI is likely to up repo by 0.5 per cent and reverse repo by 1 per cent by December. However inflation has been rising even though the RBI has already made three policy rate changes since the beginning of this year and is now at 10.55 per cent for June.

Inflation has effected the returns from the stock markets and has also crimped the profits of companies according to Ms Ritika Mankar, economist at Execution Noble. She says in a recent report “High inflation is a more powerful negative for stock market returns in India than low GDP growth. In particular, average investment returns across the broader market as well as across sectors have been systematically lower in a high inflation environment. The average stock returns on the Sensex in a high inflation vs low inflation environment are +12 per cent vs –1 per cent.”

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