No rate slash anytime soon; brace for more hikes: Analysts

Tags: News
Even after the Reserve Bank's surprise move to increase repo rate in today's policy review, many analysts say the risks to inflation continue to exist and there are chances of further hike.

The RBI today raised the key lending rate by 25 basis points to 8 per cent, while it left the cash reserve ratio unchanged at 4 per cent, saying the hike is needed to "set the economy securely on the recommended disinflationary path".

British brokerage HSBC said "the RBI is aptly concerned about the much too high and sticky core inflation reading. While it indicated that rates would be on hold in near term, we do not believe that this is the end of the tightening cycle. Further tightening is needed, in our view, to bring core inflation firmly under control."

Domestic lender Kotak Mahindra Bank, too, supported this view saying "even though today's policy decision was a bit of a surprise, the sense from the RBI is that there continues to be risk to the inflation dynamics on the upside, even after today's policy decision."

"There appears no chance for any rate reduction in the immediate future (at least in the first half of CY14), while further rate increases may not be totally ruled out, it said.

HDFC Bank Chief Economist Abheek Barua said the RBI move is unexpected and belied its own previous indication on December 18 that if inflation pressures moderate it could reduce the need to tighten monetary policy.

Rating agency Care said the rate hike indicates the RBI has clearly targeted CPI inflation as the variable to look out for. "We do not expect any change in rates in the next policy review (in April) as the 8 per cent threshold for CPI inflation is unlikely to be met by then."

Another rating agency Icra said the repo rate hike suggests that RBI is earnestly attempting to meet the targets for combined CPI set in the recommendations of the Urjit Patel Committee.

"Though the move will be negative for industry as borrowing costs are likely to inch up, the action indicates the near-term focus has clearly moved to according higher priority to inflation management over growth concerns. The hike in the repo rate may support the rupee in case of adverse external developments," it said.

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