Road ahead for country’s banking sector might become even more difficult. With liquidity tightening already taking its toll, the financial sector might just have to face another rate hike by the country’s central bank, Reserve Bank of India (RBI).
RBI is all set to announce its December monetary policy and in the backdrop of high inflation numbers, foreign institutions feel that a rate hike would happen for sure. But there are a few who feel this time RBI may not have any room to reduce rates but won’t increase them either and maintain a status quo.
Most of the global brokerage firms think that due to the latest retail inflation data which has hit a nine-month high, RBI could be forced to unleash another 0.25 per cent or 25 basis points (bps) hike in its repo rates. Bank of America- Merill lynch (BoAMl), in its report, said that a 0.25 per cent hike on December 18 is a done deal. Not only that, BoAMl also expects headline inflation or inflation based on wholesale price index (WPI) in November to inch up to 7.1 per cent, thus adding more pressure on RBI to hike rates.
Stressing on the impact inflation might have, British brokerage HSBC said, “While growth is stabilising, it remains soft. However, the main concern for the central bank will be inflation, which may compel it to raise the policy rate again by 0.25 per cent, to deliver on its hawkish promises and, through this, help anchor inflation expectations.” The firm further added that it would take some time for RBI to be able to put a check on the rising inflation.
While the global financial firms think RBI is all set to announce another rate hike, domestic banks have a contradictory view. Talking to The Pioneer, banks expressed that the RBI might not go for another round of rate hike but take measures to tighten liquidity a little more. M Anjaneya Prasad, Executive Director of Syndicate Bank said, “In the upcoming monetary policy we are not expecting RBI to increase short term rates any more. Rather, we feel that RBI could maintain all the rates and keep a hawkish stand towards inflation.”
Federal Bank’s President (Treasury), Ashutosh Khajuria expects RBI to take measure to maintain exchange rate stability and reduce volatility in the forex markets. As far as hiking repo rates go, he said, “Already there has been two consecutive rounds of hikes in short term lending rate and now we think RBI might give it a pause and maintain status quo. But everything now depends on the WPI inflation numbers but we feel inflation has now reached its peak and going forward in would start declining.”
Just like domestic banks and foreign institutions, country’s broker community is also divided interms of expectations from RBI policy. While most analysts feel that a rate hike is imminent, Ashok Agarwal of Escorts Securities said, “RBI might surprise all by reducing rates marginally instead of increasing them. By reducing rates, the supply cycle might improve as industry would be able to avail cheaper loans. Since most of the companies have either stopped or postponed their respective expansion plans, reducing rates might just kick start the process again and help attracting funds back into the markets.”