Analysts expect RBI to hike repo by 25 bps

With headline inflation inching up to 6.46 per cent and signs of stability in the currency market, analysts on Tuesday said RBI Governor Raghuram Rajan could hike repo rate by 0.25 per cent and cut the MSF rate by a similar margin in the October 30 monetary policy review.

"In his maiden policy review, Rajan stressed on inflation control as his priority. With inflation now out of RBI's comfort zone for four months in a row, we expect a 0.25 per cent repo rate hike," rating agency Crisil said in a note.

According to the research arm of the country's largest lender State Bank of India, with stability in the currency, Rajan is likely to lower the marginal standing facility rate, at which the RBI lends to the banks, once the lenders exhaust their overnight repo borrowing limits.

"We expect repo hike of 0.25 per cent and MSF downward recalibration of 0.25 per cent," it said in a note.

Official data released yesterday showed wholesale price inflation for the the month of September inching up to 6.46 per cent from 6.10 per cent for August.

The rupee had fallen to an all-time low of 68.85 against the dollar in late August, but has recovered since then on the back of steps taken by the government and the RBI.

It was trading at 61.53 this afternoon.

In spite of huge expectations from him to address the concerns on the country's sagging growth -- the June quarter growth fell to a four-year low of 4.4 per cent -- Rajan increased the repo rate by 0.25 per cent, citing pressure on the inflation front, at his maiden policy review on September 20.

He had, however, cut the MSF rate by 0.50 per cent and followed it up with a similar 0.50

per cent cut last week.

In an unconventional move, RBI had hiked the MSF to three percentage points above the repo rate in its efforts to arrest the fall of the currency by tightening the liquidity, to prevent it from being used for speculating on the currency.

It had also placed a cap of 0.5 per cent of a bank's net demand and time liabilities on the overnight repo borrowings, which resulted in the rates shooting up in the money market.

Rajan has promised a return to normal operations, wherein the gap between the MSF and the repo rate comes back to 1 per cent.

Echoing SBI's views on a repo rate hike and a cut in MSF, foreign brokerage Bank of America Merrill Lynch also hiked its March 2013 inflation estimate to 6.6 per cent from 6.2 per cent earlier.

The note from Crisil said the expectations of a good monsoon and consequentially a rise in foodgrain supply is unlikely to help the WPI inflation scenario, as foodgrains have a weightage of only 4.1 per cent in the basket.

The spike in inflation in September was driven by the jump of up to 90 per cent in vegetable prices, it added.