It could be a week of double
whammy for the Indian markets. While the Reserve Bank of India looks almost
certain to raise the benchmark Repo Rate by another 25 bps tomorrow, upbeat
economic data from the US means that the Federal Reserve may start to unwind
its massive bond buyback programme sooner than later. The US Fed meets on Dec
17-18 and any indication of a rollback could roil global financial markets.
Back home, mitigating inflation
continues to be RBI’s biggest challenge. With retail inflation well above 11%
and wholesale inflation hovering at 7.5%, it will not come as a surprise if RBI
Governor Raghuram Rajan yet again uses the central bank’s time-tested tool of
hiking interest rates at the mid-quarter policy review.
A 25 bps rate hike tomorrow
will be the third such increase since Rajan became governor in September and
will push the Repo Rate to 8.0%, a level last seen in April 2012. The successive rate hikes is bound to push
up lending rates and further hurt economic growth, which has already seen a
sharp deceleration. Expect home, auto and commercial loans to become costlier
while steps, if any, to ease liquidity may not help much.
When
Rajan took charge at Mint Street, the markets had expected the new governor to
usher in some radical changes and infuse fresh thinking in the central bank’s
approach to the growth-inflation dynamics. Yet, to be fair to Rajan, his
options in a high inflation, gigantic economy are severely limited and
willy-nilly, he has to walk down the beaten path.
Just
a few days back, Rajan had clearly spelt out his agenda when he told a group of
institutional investors in New York that inflation “is and will remain the key
priority of monetary policy” and that
efforts will be “firmly” on controlling prices.
The government too is expected
to agree with RBI’s assessment for a need to raise rates to counter inflation. After
the recent assembly election results where the ruling Congress fared poorly,
the government realizes that inflation is hurting the common man much more than
previously thought. With general elections just 3-4 months away, the immediate
challenge is to douse prices.
With the government and the
central bank on the same page, a rate hike, seen as the panacea for all
inflationary ills, looks imminent. Brace for Repo Rate at 8%.
