Bond dealers in Mumbai and senior bankers are keeping a close watch on Wednesday's US Federal Reserve's policy making body Federal Open Market Committee meeting.
The Fed is expected to hike the base rate by 25 basis points to 5.25 per cent at Wednesday's meeting and follow it up with another 25 basis points hike in August, taking it to 5.5 per cent from 1 per cent in May 2004.
Between then and now, Fed has hiked its rate 16 times, 25 basis points each. One basis point is one hundredth of one per cent.
During the same time span, the Reserve Bank of India's reverse repo rate has been hiked from 4.5 per cent to 5.75 per cent -- by 125 basis points.
Chief executives of public and private banks are unanimous that the 25 basis points reverse repo rate hike to 5.75 per cent on June 8 would be followed up by another identical hike. However, there is disagreement on the timing of the hike.
Only 55 per cent of the 20 chief executives polled by
Business Standard feel the Reserve Bank of India (RBI) will effect further rate hike in its July 25 monetary policy review.
Since May 2004, RBI has been responding to every four 25 basis points hikes by US Fed by one 25 basis points hike in the reverse repo rate.
For instance, in six months between May and November 2004, the US Fed rate rose from 1 per cent to 2 per cent. During this period, the reverse repo rate went up from 4.5 per cent to 4.75 per cent. Similarly, between November 2004 and May 2005, Fed rate jumped to 3 per cent and reverse repo rate rose to 5 per cent.
The same pattern was seen between June and November 2005 with Fed rate rising to 4 per cent and reverse repo to 5.25 per cent.
However, the pace of the RBI rate hike has gathered momentum since then. Between November 2005 and January 2006, the Fed rose its rate from 4 to 4.5 per cent but the RBI responded by hiking the reverse repo rate to 5.5 per cent. Subsequently, Fed has raised its base rate to 5 per cent and RBI to 5.75 per cent.
In other words, earlier every 1 percentage point hike in the US Fed rate was followed by a 25 basis points hike in the reverse repo rate but now every 50 basis points hike in Fed rate is followed up with a 25 basis points hike in the reverse repo rate.
The yield on 10-year government bond touched 8 per cent last week and went up to all the way to 8.20 per cent on Friday as headline inflation rate based on wholesale price index shot up to 5.24 per cent for the week ended June 10, 2006 during which the government raised petrol and diesel prices.
Forty-five per cent of the respondents said the RBI won't push up its signalling rate so soon, even if the US Federal Reserve raises its key rate for the 17th time at its June 28 meeting to 5.25 per cent. They expect the RBI to go in for an increase in the reverse repo rate only in August-September or in the October policy review.
Ten of the 11 chief executives who expect RBI to hike reverse repo rate in July, strongly feel that the central bank would in fact go in for a fourth hike in 2006.
They either expect the RBI to choose the occasion of October review to increase the rate or opt for November or December 2006 for pushing the reverse repo rate hike further. The RBI had earlier increased the ratein January 2006.
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