Rate and petrol hike a double whammy: Ficci's Kumar

The RBI has hiked its policy rate, the repo rate, by 25 basis points to 8.25 percent. The reverse repo rate has also been raised by 25 basis points to 7.25 percent. The move was in line with expectations.

[caption id=“attachment_85476” align=“alignleft” width=“380” caption=“The RBI hiked repo and reverse repo rate. Reuters”] [/caption]

“Inflation remains high, generalised and much above the comfort zone of the Reserve Bank,” the central bank said in a statement . “After slight moderation in July, non-food manufactured products inflation rose again in August, suggesting continuing demand pressures. Global crude oil prices have remained elevated despite weakening of global recovery. Moreover, there is still an element of suppressed inflation. Though global oil prices have moderated, the pass-through to domestic prices remains incomplete. Also, current administered electricity prices are yet to reflect increase in input prices, even as many states have initiated increases. Food inflation is at near-double digit levels, despite normal monsoons, underlining the fact that it is being driven by structural demand-supply imbalances and cannot be dismissed as a temporary phenomenon.”

Finance Minister Pranab Mukherjee said the governor has reinforced his commitment to moderate inflation. " Headline inflation continues to be matter of concern. He said he is hopeful the RBI’s measures will help bring back inflation to comfortable levels.

India’s economic growth has cooled as the cumulative impact of earlier rate increases and rising prices crimp demand, and an expected pause in tightening connects it to the Asia bandwagon of central banks rolling back on rate hike campaign.

Reacting to the RBI hike, the Nifty is virtually flat and has gone back to 5080 levels. Bond markets have not yet reacted because the markets are yet to absorb the rate hike which is entirely data driven.

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C Rangarajan, chairman of PMEAC, said the RBI did not have any option but to raise interest rates. he added that the Reserve Bank’s policy will be largely determined by the behaviour of inflation, and if the inflation does not go down in the next six week the policy stance should remain the same.

Jim Walker , MD of Asianomics says the RBI has put too much weight on the WPI while determining the policy and will start watching growth numbers quite carefully now. However, he said the policy is a sensible one. He added that foreign investors are looking for the rupee to go lower, and the policy hike will probably make the stock market more attractive to investors.

Ficci Secretary General Rajiv Kumar slammed the RBI saying that it was using a “sledgehammer to swat a fly and said by raising the interest rates, RBI is not going to help anyone. A twelfth hike is not going to achieve anything. The fall in inflation will not be because of the monetary policy, he said " I am not sure what the RBI is going to achieve here.” He added that an exclusive attention to headline inflation is not right. " RBI and petrol hike is a double whammy for India." He also cast doubt on the full-year growth assumptions and warned that the assumption that the economy could achieve 7 percent growth should not be “taken lightly”.

Ajay Seth, CFO, Maruti Suzuki said the rate hike will have a dampening effect on demand for passenger cars. He also noted that combined with the petrol price hike, " the signs are not looking very positive. They (rate and fuel hikes) can hurt demand moving forward".He added that supply from ancillary services are going to be affected as most of them are leveraged companies.

Nirmal Jain, IIFL said the market was widely expecting the 25basis point hike and the market is working on the assumption that there won’t be another rate hike in October. He, however, said that inflationary pressures are beyond the control of monetary policy at the time.

A top Bank of India official thinks banks should brace for more rate hikes if inflation does not come down. But he feels that the 18 percent credit growth can still be maintained.