The Repo Rate Hike: Inflation Gave the Cover, the Rupee Gave the Reason

Food inflation accelerates but the RBI may NOT go in for CRR hike immediately, to  jeopardize an already battered economy:

However, the bourses have already factored in a 25 basis points hike in CRR:

NEW DELHI: India's annual food price inflation accelerated for the first time in four weeks, with the Reserve Bank of India (RBI) may look to go in for a small hike in the CRR, as the interest rate hike is just a misnomer at this time. 

Though according to survey conducted by Economic Times, Economists widely expect a 50-basis point rise in banks' cash reserve ratio (CRR), the proportion of deposits lenders must keep with the RBI in cash, what I feel is that RBI could at  best hike 25 basis points not more than that, since the condition of the Indian economy is still fragile.  

"Even as food supply is expected to normalise in the coming months, higher energy costs and strong consumer demand will ensure (headline) inflation inches towards 9 percent by March 2010, with risks clearly to the upside," said Rahul Bajoria, an economist with Barclays Capital in Singapore. 

The food price index rose 17.40 percent in the 12 months to Jan. 16, higher than an annual rise of 16.81 percent in the previous week, data released on Thursday showed. The index rose 0.4 percent from a week earlier. 

The fuel index rose to an annual 5.70 percent, lower than an annual rise of 6.34 percent in the previous week. 

Higher food prices following a bad harvest of summer-sown crops are expected to keep headline inflation elevated, with some analysts forecasting the wholesale price index to touch double digits by March, 2010. 

The debt markets have already priced in a 25-50 basis point increase in the CRR, with some dealers also hedging in anticipation of a 25-basis point rise in policy rates on Friday. 

However, 24 out of the 25 economists polled by Reuters do not foresee any change in policy rates on Friday and expect a rise in key rates only in March. 

"Current inflationary pressures are not driven by excessive aggregate demand," Rajiv Malik, an economist with Macquarie Securities, said in a note on Wednesday. 

"So hiking of policy rates now will be relatively less helpful in checking food inflation, but could cause a negative impact on growth." 

Dealers expect bond prices to rally and yields to touch 7.45 percent if the RBI hikes only the CRR and keeps interest rates unchanged. 

India's economy is expected to expand at 7 percent in the current fiscal year to end-March, faster than 6.7 percent last year, helped by a recovering global economy and rapid expansion in domestic industrial output, a Reuters poll showed. 

The economy grew 7.9 percent in the quarter through September, its fastest in 18 months, while industrial production grew in November at its fastest pace in more than two years at 11.7 percent. 

That growth, however, has largely been fuelled by government stimulus spending and cheap credit following policy rate cuts totaling 425 basis points between October 2008 and April 2009. 

Non-oil imports, which foretell production and capacity creation in the economy as India primarily imports capital goods and basic raw materials, fell an annual 5.9 percent in November.

The growth in bank loans, a barometer for private investment in the economy, continues to be sluggish. Bank loans grew an annual 13.7 percent as of Jan. 1 compared with the RBI's forecast of 18 percent for the current fiscal year ending March.