The Reserve Bank of India (RBI) on Tuesday raised key interest rates by 25 basis points, as expected, tightening policy for the second month in a row as inflation heads towards double digits.

The Reserve Bank of India also raised its cash reserve ratio (CRR) requirement for banks by 25 basis points, as expected, in a move to drain further liquidity from the financial system.

Following are reactions from senior company officials after the policy announcement.



A.S. MEHTA, DIRECTOR-MARKETING, JK TYRE & INDUSTRIES

"I would say that 25-basis point increase was in the offing and was expected. I think that when banks have deposits and when credit offtake is there banks can afford not to increase rates at this point of time.

From RBI's point of view, this increase in rates would be enough, especially if there is a softening in food-led inflation. However, a price increase is necessary for tyre makers if rubber prices stay at such high levels".

K.G. MANTRI, SR VICE PRESIDENT, MAN INDUSTRIES

"RBI has raised rates very nominally. They've given clear signals that they're not going to compromise on growth. They've given priority to growth over inflation.

"There will be more opportunities for foreign fund investments and that will neutralise the high cost of borrowing."

H.M. BANGUR, MANAGING DIRECTOR, SHREE CEMENTS LTD

"I hope, this is a temporary step. As soon as the economy cools down a little, it (CRR) would be reverted to the earlier position. Temporarily, the demand (for cement) will come down because when economy slows down, the GDP growth comes down; of course, we all will be affected."

VARDHAN DHARKAR, CFO, KEC INTERNATIONAL

"I don't think borrowing rates would go up. There is ample liquidity in the system and... international rates are low and are going to be lower for maybe six months. I think, RBI has tried to balance the inflationary concerns with the growth."

T SRINIVASA RAO, VICE PRESIDENT (FINANCE) AT RAIN

COMMODITIES LTD

"This is in lines with our expectations. No, I don't think there will be any significant impact (for cement sector). There will be a minor impact, interest rates will harden, but these are all expected. There is nothing surprising..."

"By the mid of the year, around September, they should do it again (rate hike)".

Lakshmi Iyer – Head (Fixed Income and Product), Kotak AMC

“By hiking the benchmark rates by 25bps, the RBI has stuck to its stance of normalizing the rates in a calibrated manner. Thus the RBI has attempted to curb in inflationary expectations as also providing sufficient head room for growth. The 25bps CRR hike is not likely to impact liquidity adversely thereby ensuring sufficient funds for credit demand”.

Ramanathan K, CIO-Single Manager, ING Investment Management India

A 25 bps point hike in reverse repo, repo and CRR is in line with expectation. The RBI is moving at a measured pace to make the rates neutral. We expect further hike of 50-100 bps in steps to achieve this objective. RBI has changed its policy priorities to contain inflation still mindful of not impacting growth significantly given the uncertain global environment. A positive for infrastructure companies is the provision for infrastructure bonds to be held in the HTM category and the reduction in provisioning norms of infra sub-standard assets.

Chandrajit Banerjee, Director General, Confederation of Indian Industry (CII)

CII appreciates the RBI’s concerns about rising inflation, which has made it increase the policy rates by 25 basis points and reduce liquidity through a simultaneous increase in the Cash Reserve Ratio. Going forward, the RBI will need to calibrate further tightening given that industrial growth and investments need to be supported through the availability of funds at a reasonable rate. CII believes that the RBI is aware of the challenges faced by industry at a time when credit growth is picking up and capacity expansions are taking place.

Rohini Malkani, Economist, Citi India



As the money market was expecting a 50bp hike across all rates, bond yields have come off with the current 10-year now trading at 8.03 per cent vs. 8.09 per cent earlier. However, given the uptick in private sector credit,coupled with the fact that despite a lower budgeted borrowing program the fresh issuance of securities will be 36 per cent higher in FY11, yields could edge towards 8.5 per cent levels.

Siddhartha Sanyal, Economist, Edelweiss Capital

The current RBI move is perfectly in line with our expectations. We think, this is a balanced approach amidst the current uncertainty. It will help the central bank anchor inflation expectation effectively without being harsh on growth. The current tightening is being accepted favourably by the markets as: (1) this is broadly in expected lines, (2) it once more reiterates RBI’s continued confidence in the ongoing economic recovery; and (3) even after such tightening (and factoring in a few more doses in the coming months), policy rates will still stay far below their “steady-state” levels (e.g., long-term average level of repo rate in India is ~6.0-6.5 per cent). In sum, it definitely conveys RBI’s commitment to tackle inflation and anchor inflation expectations, and yet will not put undue pressure on liquidity or the general spectrum of interest rates.

Dr Devendra Kumar Pant, Director, Fitch Ratings

RBI's action of increasing Reverse Repo, Repo Rate & CRR by 25 basis points each was more in line with current macro-economic & inflation trend. However it was lower then the expected. In its inflation diagnosis RBI says that the demand pressure may rise as recovery gains momentum.RBI's assessment of FY 11 GDP growth at 8% is more in sink with the present situation. Today's RBI action will help in cooling inflation expectation.

Dhruva Raj Chatterji, Research Manger, Fundsupermart.com

The hike in policy rates and CRR was along expected lines and factored in by markets. With credit growth picking up, inflation spreading to other sectors and strong recovery in economic growth, the RBI seems to be set to hike rates further in a calibrated manner. We expect inflation to moderate from June onwards, especially on the food side, although inflation spreading to other sectors and rising oil prices still remain a concern. Meanwhile the scheduled government borrowing calendar during the first half of the fiscal will keep bond yields buoyant. The move by RBI to allow banks to classify their investments in non SLR bonds issued by infrastructure companies having minimum residual maturity of 7 years, under the Held To Maturity (HTM) category will also be positive for them.

Maneesh Dangi, Head of fixed income, Birla Sun Life Asset Management Company

RBI raised the CRR, repo and reverse repo rates by 25bps (to 6%, 5.25% and 3.75% respectively) with focus of the policy shifting gear towards anchoring inflation. With 3.75%-5.25% rate corridor, the rates are still significantly below historically normal rates, and have a lot of room to go up. We expect the rates to rise by another 125 bps from here by the end of this financial year.

In its stance on monetary policy framework, RBI acknowledges that both recovery and inflation are becoming broad based with real rates lying in negative territory. RBI also sites a dilemma between the action required for debt management consideration vs monetary policy consideration, the former warrant supportive liquidity considerations and the later demands absorption of excess liquidity. We continue to believe that for the first half, the balance of these two considerations would weigh in favour of adequate systemic liquidity and the same will support benign short term rate curve.

As for G-sec, notwithstanding the lower budgeted borrowing for the current financial year, fresh issuance of securities in the current year is 90k crores more than the previous year, in a regime when liquidity conditions are going to be less benign and credit demand is likely to pick up. Thus, we believe that, G-sec curve will remain under pressure for some more time, but will surely give good opportunity to earn returns once DD/SS dynamics turn benign.

Aneesh Srivastava, Chief Investment Officer, IDBI Fortis Life Insurance Co Ltd.

The RBI policy announcements seem to be in line with market expectations of increases by 0.25% in Repo, Reverse Repo & CRR. There was also an expectation that the RBI may announce some capital controls for foreign investment inflows; however same was not a part of the announcement.

RBI’s monetary policy has to be read in conjunction with the 10% inflation (WPI), a 16.5% growth in M3, a 15%-17% growth in IIP, high capacity utilization, a 7% plus current and 8.5% expected growth in GDP and rising asset prices. Hence, it had become necessary for the RBI to exit from emergency monetary measures adopted to support growth and lean towards controlling inflation and inflationary expectations, thus moving towards a more neutral interest rate environment. This current move is one step closer towards tightening the monetary policy in months to come.

While moderate & stable inflation is good for the growth of the economy, we have observed a highly volatile range for inflation from 0% to now 10%. This explains the need for action by the RBI. The inflation may take longer to start coming down due to poor monetary policy transmission to credit markets. We expect the inflationary pressures to subside during the second half of this fiscal year due to policy action and base effect but the future course of inflation would also depend upon quality of monsoon.

We expect the 10 year G-Sec to move within our expected band of 7.75% to 8.25%. Though, a rising CRR may lead to some pressures on cost of borrowing for the corporate sector.

Ms. Yashika Singh, Head of Economy Analysis Group from Dun & Bradstreet.

“An increase of 25 bps across key policy rates indicates a complete shift in the focus of the monetary policy towards the containment of inflationary expectations. At a time when economic growth is showing signs of consolidation, and demand side pressures are expected to start building up slowly, this rate hike will put the monetary policy ahead of the curve. Even though we had initially believed that the rate hike might not occur at this juncture, the Central Bank has accorded a high priority towards rising inflation when it comes to downside risks to growth. There will be an upward pressure on interest rates, but is unlikely to impact credit growth immediately. Going forward, we expect a further increase in CRR during May-Jun, given that the upward pressures on liquidity are likely to persist on account of an expected sustained foreign fund inflows. Moreover, the tools deployed towards inflation control and the maintenance of current growth momentum are underscored by an assumption of a normal monsoon - any deviation in monsoon is likely to create further dilemma on the policy front.”

Divyesh Shah, CEO, Indiabulls Securities.

"Contrary to market expectation of 50bps hike in CRR the RBI has announced hike of 25bps which beats the market expectation and set the stock markets on a strong note –the tone which sets in from the RBI policy is that of confidence in the domestic economy with a strong growth also the announcements on modification on infra financing measures will help them to raise money easily."