Rate expectations rise after Raghuram Rajan's Friday shocker

Raghuram RajanEconomists are split over whether Raghuram Rajan will hike rates again at RBI's next policy review on October 29.

Expectations for monetary policy have shifted towards further tightening after the Reserve Bank of India's surprise increase in the policy interest rate on Friday, a new Reuters poll shows.

Economists are now split over whether new RBI chief Raghuram Rajan will hike rates again at the central bank's next policy review on October 29.

Nearly half of those economists surveyed, 16 of 31, expect Rajan to leave rates on hold at the meeting, while 15 expect a further 25 basis point (bps) increase, which would bring the policy rate to 7.75 percent.

By the end of the fiscal year in March, however, the vast majority of respondents -- 25 of 31 -- expect the repo rate to be at least 7.75 percent.

Sixteen of those predicted the rate will climb to 8 percent, implying 50 bps of further tightening by then.

That compares with the last Reuters rate poll, which showed a slight majority among 41 respondents expected the rate would be reduced to 7 percent or lower by the end of March.

"Expectations of rate hikes have gone up now as monetary policy has given a clear and transparent signal that an upward bias on long-term interest rates will continue as long as there remains concern over currency stability and core inflation from CPI (consumer price index)," said Rupa Rege Nitsure, chief economist at Bank of Baroda.

Rajan's focus on curbing inflationary pressures despite growth languishing at a decade-low was not anticipated by economists, none of which had predicted in a Reuters poll that he would raise policy rates on September 20.

Rajan surprised markets with India's first policy rate increase in nearly two years in a bid to ward off rising inflation, while rolling back part of the increase in the marginal standing facility (MSF), an overnight rate, reassuring markets that recent liquidity tightening measures put in place to bolster the ailing rupee were temporary.

... contd.

Please read our terms of use before posting comments
TERMS OF USE: The views expressed in comments published on indianexpress.com are those of the comment writer's alone. They do not represent the views or opinions of The Indian Express Group or its staff. Comments are automatically posted live; however, indianexpress.com reserves the right to take it down at any time. We also reserve the right not to publish comments that are abusive, obscene, inflammatory, derogatory or defamatory.