RBI can afford to be less hawkish – BarCap

Reuters | Aug 20, 2010 | 2:16pm IST

The Reserve Bank of India will probably pause after raising interest rates for a fifth time this year in September, signalling a less hawkish stance as inflation pressures begin to ease, an economist at Barclays Capital said. The Reserve Bank of India (RBI) has increased its main lending rate by 100 basis points since mid-March to rein in high inflation. The tightening policy has cooled headline annual inflation to just under 10 percent in July, after stubbornly staying in double-digits for five months. “The RBI is no longer behind the curve as far as managing inflation or inflation expectation is concerned,” Rahul Bajoria, regional economist at Barclays Capital, said in an interview. “So from that perspective I think the RBI can possibly afford to be slightly less hawkish from here on.”

Rising rates have also weighed on factory output, which rose at its slowest pace in 13 months in June at 7.1 percent from a year earlier. Exports grew an annual 30 percent in June, slower than 35 percent rise in May. Still, the RBI has forecast the economy will expand 8.5 percent in 2010/11 from 7.4 percent last year and the fastest pace among major economies after China. Bajoria reiterated the bank’s forecast for another 25 basis points increase in key rates by the RBI when it reviews policy on Sept. 16. “The market has fairly priced in both policy rate hike and liquidity constraints. Once the RBI has given its intention that repo rate will be the operating rate, I don’t think market is panicking on the liquidity situation,” he said.CASE FOR PAUSE

“The reason why I think they are likely to pause beyond September is simply that the situation is going to turn around in 3-6 months, not in the near term,” Bajoria said. He expects headline inflation will ease to 5 percent by next March, more optimistic than the central bank’s forecast of 6 percent. “Risks to growth and inflation are much more balanced now than it appeared a month back at the July credit policy,” Bajoria said. “Momentum of non-food manufacturing inflation … appears to be broken now. We have seen two months of sequential decline in it,” he said. Bajoria said the RBI would keep money supply on a tight leash, while foreign equity investments could ease due to expensive stocks but would still be comfortable at $4 billion to $5 billion a quarter. Bajoria doesn’t expect RBI to take any major steps to ease liquidity until it gets extremely tight. Government spending will accelerate from October when the festive season begins in India, and this should prevent liquidity from tightening sharply, he said.


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