A majority in the mint street is expecting a hike in CRR and policy rate, namely reverse repo rate, by RBI in the upcoming third quarter monetary policy review on January 29, 2010. The reason stated for this is the runaway inflation that touched 7.31 per cent in December 2009 and expected to go upward of 8.5 per cent by end-March 2010. The anticipation is that RBI might like to rein in the excess liquidity of an average Rs. 70,000 crore sloshing around the market during January 2010 by raising the cash reserve ratio by 50 bps. And to anchor inflationary expecations, it might raise the reverese repo rate by 25 bbs to prevent a possible structural change in wage (and inflation)-unemployment equation exhibited in theory by short-run Phillips curve, besides transmission of inflation to other sectors through an increase in agro inputs cost.
Though RBI will surely think of raising the CRR, but it may not rush to raise the reverse repo rate as expected. It might wait for some further clarity to emerge from the GDP front. After all, it does make sense for RBI to wait for third quarter GDP results to be sure of recovery firmly in ground, since the biggest worry, agriculture, is expected to take a hit to the tune of minus 3-3.5 per cent of GDP in the current fiscal. This is based on first advance estimate of foodgrain productions that showed a fall of 16 per cent in the krariff season. If that is not enough, credit growth (y-on-y) is still subdued at 14.4 per cent reported for the fortnight ended January 15, 2010 much below the projected growth of 18 per cent stated by RBI in its second quarter review. After all, RBI may not risk of puncturing a credit recovery at this stage by raising policy rate, keeping in view the gradual sheepish translation of loan sanctions into loan disbursements as reported by a majority of commercial banks. As inflation is expected to come down post March 2010 on the back of release of buffer foodgrain stocks by the Govt. and an expected normal monsoon, corporates might relax and focus on their capex plans without fearing for an upward shift in rate structure till the third quarter of FY11.
Though RBI will surely think of raising the CRR, but it may not rush to raise the reverse repo rate as expected. It might wait for some further clarity to emerge from the GDP front. After all, it does make sense for RBI to wait for third quarter GDP results to be sure of recovery firmly in ground, since the biggest worry, agriculture, is expected to take a hit to the tune of minus 3-3.5 per cent of GDP in the current fiscal. This is based on first advance estimate of foodgrain productions that showed a fall of 16 per cent in the krariff season. If that is not enough, credit growth (y-on-y) is still subdued at 14.4 per cent reported for the fortnight ended January 15, 2010 much below the projected growth of 18 per cent stated by RBI in its second quarter review. After all, RBI may not risk of puncturing a credit recovery at this stage by raising policy rate, keeping in view the gradual sheepish translation of loan sanctions into loan disbursements as reported by a majority of commercial banks. As inflation is expected to come down post March 2010 on the back of release of buffer foodgrain stocks by the Govt. and an expected normal monsoon, corporates might relax and focus on their capex plans without fearing for an upward shift in rate structure till the third quarter of FY11.
