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More hikes expected in the coming months: Experts

June 16, 2011 15:08 IST

Terming the RBI's move to hike key interest rates by 25 basis points in line with market expectations, analysts said there is a high probability of a couple more hikes during the year.

The Reserve Bank on Thursday raised key short-term lending and borrowing rates by 25 basis points for the 10th time since March, 2010. While the short-term lending (repo) rate has been raised to 7.5 per cent, the borrowing rate has been hiked to 6.5 per cent.

"25 basis point hike in policy rate was on expected line. Based on monthly trend of non-food manufacturing sector inflation rate, probability of couple of more hikes in rest of the year is high," Fitch Ratings India Private Director Devendra Kumar Pant said.

He added, "Although RBI started tightening from March 2010, its transmission to consumer was not immediate. It is now, banks have started increasing their base rate/prime lending rate, which will help in cooling demand and control inflation."

Analysts see more rate hikes in the coming months. MAPE Securities Head of Research Kislay Kanth said, "The RBI will watch inflation trends and raise policy rates again, but we have a belief that global investments will start flowing in again (post some action by the government) and the global commodity prices will cool down further so that further rate action may be minimal."

Although investment environment has become much tougher in the last 6-months and both domestic and FDI investments have dried up, the RBI strongly felt that first priority is to control prices and investment can be a second priority, he added.

The industrial production has been slower in April-May 2011, and the fourth quarter GDP growth was only 7.8 per cent.

The RBI continues to be hawkish despite these factors. There may be even more increases in future, although it may not be very healthy for growth and investment, Kanth noted.

Expressing similar sentiments, Unicon Financial Services CEO Gajendra Nagpal said, "The hike in rates was on expected lines," adding that the market is anticipating another hike in rates by 25 basis points in July.

Market analysts said that just increasing the key policy rates is not going to tame inflation. Inflation continues to remain high despite the RBI raising lending and borrowing rates.

However, they added that the increases underline the RBI's determination to fight stubbornly high inflation.

They said at least one more hike is expected this year, but if inflation doesn't stabilise, more hikes may be on the cards.

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