RBI raises repo rates to 8% in its Macroeconomic Policy announced today.
We are now going back to the same level as in Jan 2013 (My post), when we started this series of rate cuts.
[Gloating] I predicted the rate hike, when I wrote about the Urijit Patel Committee Report. But I said that we’ll need 0.50% to impact anything.
If the 4% (with a 2% range) CPI inflation target is taken seriously, then the RBI will raise rates on the 28th. CPI Inflation is at 10% while the target is 8% in one year, and current short term rates are between 7.75% and 8.50%. Yesterday’s 28 day term repo went at a low 8.15%.
To bring inflation down, rates will have to be continuously raised, no matter what the level, to bring CPI down to the target. We might have to see a 0.50% (50 basis point) increase in rates in January, and then 25 basis points every three months until we reach the 6% number.
This I suppose was unlikely, but I did get the direction right. In fact I wrote earlier this week that My view is now that Rajan will raise the repo rate 0.25% or 0.50%.
Nearly nothing. Rates are already above 8% on the call money, term repo (14 day and 28 day). Repo is limited to 40,000 cr. which is just about 40% of the amount banks borrow from the RBI.
That means the floor on bank borrowing rates is already 8%.
Importantly, they chose to say this:
The extent and direction of further policy steps will be data
dependent, though if the disinflationary process evolves according to this baseline
projection, further policy tightening in the near term is not anticipated at this juncture.
This is disheartening because that is the takeaway people have, that RBI might not tighten. Even if inflation remains above 8% all the way till 2015, we will not tighten! This is very bad form, because a respite in rates will be negated by a recovery just based on the assumption that this is the rate ceiling.
And in effect, we are saying we don’t want positive real rates. The current repo rate of 8% is lower than the 50% confidence estimate of inflation of the RBI next year at 8%. I feel this is a blunder and we need to fix it.
We have a webinar for Capital Mind Premium subscribers at 1 PM today for a Q&A on the policy.