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Will RBI increase rates on account of high inflation?

Created by : Esha Johar, Risk Analyst, Irevna  | 01 27 2010 11:32:43 +0000
Industry : BankingFunctional Area : India(Markets)
Keywords : inflation rbi rates
Activity:  166 views;  last activity : 07 06 2010 20:18:09 +0000

The Reserve Bank of India (RBI) has a pretty tough task of managing growth and liquidity. It needs to balance these compelling forces. It seems, an interest rate increase may be around the corner. The outlook for interest rates is bearish in the backdrop of the rising inflation rate caused by higher government borrowing and the expectations of a monetary policy tightening by the central bank.

The movement in interest rates will depend on a number of factors. The higherthan-expected growth numbers have renewed concerns that the RBI may soon initiate measures to mop up surplus liquidity, which left by itself could drive prices of assets and commodities up in a fast-growing economy. Presently, commercial banks have to park 5% of the deposits raised every fortnight as CRR with the RBI. With liquidity remaining in surplus, liquidity tightening measures are likely to precede a rate hike.

So users, do you think RBI will increase the rates on account of high inflation?

  
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I think that RBI will increase the rates for controlling the inflation raging. There is a need to control inflation and the government has to take steps to check inflation and rates as nobody has interest in common man and therefore there are many suicides. When inflation is raging, the rates are artificially kept down. The common man is badly affected by high inflation rate and low return on his savings. So it is necessary for the builders lobby & commodity exchange influence on economy to be curtailed to check price rise. Also, low interest rates are for the benefit of the businessman only. For.e.g. As home loan interest rate goes down ,home buyers start approaching builders, they start increasing the prices. Means businessmen are real gainer. So, RBI should remove excess liquidity first and government should initiate measures to control black marketing to bring down food inflation. Also, inflations seems to be out of control and government in a situation to increase rates before it crosses double digits which affects the economy.
By Esha Johar, Risk Analyst, Irevna  01 27 2010 11:36:40 +0000
 
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We are 2wait just one or 2days.

When Union Budget '10 is just ahead, RBI may not do anything drastic. A small hike here and there. Nevertheless, RBI and Govt. should not act in opposite direction .. !!
By ASOKE KUSARI, Domestic Private Banking-Executive/Manager, A large leading PSU Bank - India  01 27 2010 14:18:56 +0000
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yes inflation is sky-rocketing and sucking out excess liquidity is a must. As esha has mentioned , the poor are getting even more poorer.

issue of credit at a cheaper rate by maintaining lower interest rate is definitely not going to benefit the SME's . ,but is only going to add wealth to the already cash rich beuracrats in our society. if you calculate the real  inflation rate, for example on a cup of tea consumed, then actual inflation is not around 7% but, almost thrice the figure,considering the hike in price of sugar, milk, etc in the past three months. 

Interest rate hike would follow the CRR revision that has happened recently, depending upon the respone and probably govt. would give a breathing time to elicit the response before actually increasing the interest rates to sustain momentum in the economy

Poor people cannot 
By padmapriya , MBA/PGDM student, IBS Mumbai  | 02 01 2010 16:47:01 +0000
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The RBI will have to increase the rates, the liquidity in the system is access and has to be controlled. The RBI may not be very aggressive in increasing the rates as of now, but a major change in the policy is surely on cards after the Union Budget. It will be compulsion for the RBI as to control the inflation. . . .
By Japan Shah, Assistant Professor, Oxford School of Management  | 01 27 2010 18:32:17 +0000
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It is possible....Esha agreed with you

 
By Nitin M Aras, XYZ  | 01 27 2010 15:19:35 +0000
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Food prices are on rise and this is because of the RBI's easy credit policy.Instead of creating production the easy liquidity has gone to speculative purpose.More than that the present RBI Governor is bullied by the media and industrialists unlike his predecessor Dr,Y.V.Reddy. He must increase CRR by 1% point and also increase repo rate by 1% to control inflation.Otherwise inflation will go out of control and there will be mass unrest with opposition parties pillorying the government for not  protecting the common man and RBI helping the hoarders and speculators
By K.VITTAL SHETTY, Chief Executive Officer, MITHRA SOUHARDA CREDIT CO-OPERATIVE LIMITED  | 01 27 2010 15:12:59 +0000
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RBI at this point is chasing it's on tail. The credit market is stagnant and the banks are reducing their rates, but the inflation is high. So even wiithout credit outflow they are able to produce and raise prices. This means RBI has lost it's teeth by this seasaw lowering and raising rates. Moping up the excess liquidity may be one intention, but usualy countries do it through a different route using T-bills. Here we in India we do lot of things that don't make sense to a practioner. They ultimately foul up the whole situation and citizen catches flu and cold. I feel the inflation is only in farm products and that may be due to lot of factors like many of our farm products being exported and the inefficient logistics mechanisms, where the vendors try to cover the risk for things not sold etc;. Moreover I feel our objectives are not clearly visible so had been from independence, so we have to assume we are facing an irrational situation here a country that cannot state it's objective either verbaly or through their actions. We also have to persume we are dealing iwth some sort of Nerotics as leaders from independence.
By Mathew Cherian, Research Associate/Analyst, Western Michigan University  | 01 28 2010 18:43:20 +0000
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Even i dont think there will be any other hike rather than CRR. Saying this based on : 1. The higher inflation is basically from food side and the oil end. And the food side hike is basically due to supply end and therefore even if RBI hikes the rates that may not much affect the inflation to greater extent. 2. Hike at this end of time when the markets have just recovered and completely not confident, i dont think the RBI will try to hike and suck the liquidity and dampen the confidence of the retail investors basically. 

So i strongly feel there will be hike somewhere in the next quarter and not now. ... Thank you, Manish N

Cheers!!
By Manish N Chugh, Officer Trainee, Stock Holding Corporation of India ltd.,  | 01 28 2010 14:41:41 +0000
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I don't think RBI is going to increase the prices in the next 4 months. Increase in rates is no answer for supply side woes. Rather, by increasing the rates, the situation will be more worse. Businessmen will also increase the cost of their services which will effect common man more. I think government should controll the rising prices and set a minimum value for all services which doesn't give much problem to the common man.
By Rakesh Chakraborty, Sr. Associate, ING  | 01 27 2010 11:42:39 +0000
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