Terming the RBI’s move to raise key policy rates by 50 basis points as in-line with market expectations, analysts said the move by the apex bank reflects the dominance of fighting inflation over growth in near-term.
The RBI today raised lending (repo) and borrowing (reverse repo) rates by 50 basis points to 7.25 per cent and 6.25 per cent, respectively.
“RBI’s policy action to raise policy rates by 50 bps, a break from its preference for calibrated policy rate hike in steps of 25 bps at a time, is in-line with our expectation and reflects the dominance of fighting inflation over growth in the near-term,” IIFL Economist Ashutosh Datar said.
He said inflation, especially core inflation is at uncomfortable levels and RBI will have to continue policy tightening in the months ahead to contain it from becoming generalised at elevated levels.
“We expect another 50 bps hike in policy rates till the end of the year with risks on the upside,” he noted.
Expressing similar sentiments, SMC Global Securities CMD Subhash Chand Aggarwal said, hike in repo rate was on expected lines adding that, the RBI had no option but to increase repo rate by 50 basis points to contain inflation, which refuses to fall down in view of high crude oil and commodity prices.
SMC Global welcomed hike in savings deposit rates, which according to them will be good for savings bank account holders.
Analysts said the aggressive RBI action is likely to help slowdown credit off-take and reduce demand in the system which will help counter the rising fuel costs and associated increases in production costs.
However, they feared this will dampen the growth estimates of the economy and capital inflows will stay subdued.
“As the system slows down, the EPS growth estimates will slowly be revised down and the markets will therefore, stay capped and not rise rapidly above the recent levels of 5,800—5,900 in the near-term, until the global commodities rally subsides in any meaningful manner,” MAPE Securities Senior Director of Research Kislay Kanth said.
Experts said RBI actions on the monetary policy for 2012 has been fairly aggressive and the intent has been made clear to fight the inflationary trends in the economy.
“RBI has not been shy of sacrificing some growth in the process and they have reiterated that they would take further action if inflation does not ease off following these steps,” Mr. Kanth added.