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Will The RBI Raise Rates Again?


On Friday, the Reserve Bank of India will release the mid-quarter review of Monetary Policy (12 noon). Will it raise rates again, after 11 consecutive rate raises? We have seen rates rise from the 4.75% lows to 8% on July 26. In the mid quarter review, large policy decisions are not something we should see; it’s supposed to be just  a review.

So no, just because it’s a review doesn’t mean big things can’t happen. And yes, it’s a good thing, because three months is too long to wait in the fast information age.

The 2011 history

January started at 6.25% but the Jan meet saw RBI taking that up to 6.5%. March saw a 25 bps hike to 6.75%. In May we saw a hike of 0.50% in Repo along with a slew of policy changes, such as introduction of a penalty-rate Marginal Standing Facility, higher provisioning requirements, increased Savings Bank Account rates and so on. In June (I was on holiday, so no post), the repo rate was hiked another 0.25%. July saw a hike of 0.50%

A longer history:


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The Rate Hike Argument

Raising rates was always meant to control inflation, which doesn’t look like it’s really getting controlled.

The chart of inflation at the primary and fuel level:


Inflation at the basic level doesn’t look like it’s ebbing. Plus, each new data release has revised past data significantly upwards, so there is some consternation that the recent numbers are even higher in reality.

No Rate Hike?

There are multiple reasons that another hike is not necessary:

  • Growth is slowing. With recent GDP figures at 7.7% and IIP coming in at 3.3% we might be slowing. But even the RBI has said that both GDP and IIP figures are highly unreliable (revisions can be huge – MOSPI is just not getting that right). And even then, the GDP slowdown is not much. Inflation – which is not changing, is a bigger problem.
  • The Subbarao factor: Subbarao’s term was to come to an end in September, which is why, perhaps, he chose to do a 50 bps hike – the last sigh is always remembered. But his term has been extended – perhaps he will compensate by not hiking in the mid-quarter review?
  • The Global Slowdown is now getting more and more concerning, with PMIs all over the world falling. Why raise rates here when globally, economies are slowing down?
  • There is another financial crisis likely in the west. European equities are falling dramatically – the DAX is down over 25% in a month. Greece is looking close to a default and Ital is now in trouble. The indicators all point to a hard landing for peripheral Europe, unless the countries are able to win support for a greater fiscal union, from the current monetary one. In the face of a crisis, rate increases may exacerbate panic.
  • The dollar rupee equation is the worst, for the rupee, in 17 months. At 47.09, the drop from the 44 levels ensures at least 5% inflation (since the rupee has fallen 5%). Rates won’t change that equation (we don’t allow foreigners to buy much of our debt) so another measure could be taken. (Read: Why Only Interest Rates? and Stop Buying Dollars, Curb Money Supply and Inflation)
  • Brazil recently cut rates despite having high inflation. (But their growth had fallen substantially)

My View

I think we get at least 25 bps. The RBI’s recent statements don’t seem very suggestive of a pause, and they really do a lot of gestures and postures before changing course. However, it’s important to keep questioning a theory; what do you think?


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