Economists now expect the Reserve Bank of India (RBI) to raise interest rates one more time in 2011 after earlier predicting that a Friday increase would be the last of the year, a poll found.

The change in sentiment follows the RBI’s move on Friday to lift rates by 25 basis points, which had been expected, along with tough anti-inflationary language, which took investors by surprise.

Of the 12 respondents, 7 expect at least one more rate increase by the end of December, while five expect the RBI’s main repo rate to hold steady for the rest of the year at 8.25 percent after Friday’s move.

Only one expects the repo rate to rise during 2012 to its pre-2008 financial crisis level of 9 percent, while three expect a cut next year.

The RBI’s next policy review is on Oct. 25.

Expert views on RBI rate hike

The Reserve Bank of India (RBI) raised interest rates on Friday for the 12^th time in 18 months and said it would persist with its anti-inflationary policy stance, even as growth slows in Asia’s third-largest economy.

The RBI lifted its policy lending rate, the repo rate, by 25 basis points to 8.25 percent, in line with expectations, as it persisted in a thus far largely futile fight to curb inflation.

The RBI said it was too soon to ease back from its anti-inflationary bias.

“A premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance,” it said in a statement.

COMMENTARY:

RADHIKA RAO, ECONOMIST, FORECAST PTE, SINGAPORE:

“The accompanying policy statement, highlights the tight spot policymakers’ are at this juncture. Market interpretations are likely to vary in a classic half-full, half-empty scenario.

“Our take is that the comments still sound predominantly hawkish as the RBI stressed that inflation was still above comfort and generalized, with the marked rupee depreciation also bearing adverse implications for inflation.

“Bottom line is that the central bank still wants to keep the door open for further rate tightening, prompting us to maintain our call for another 25 bps hike at the year-end meeting.

“While odds of a pause are on a rise, we believe that any intermittent pause might run the risk of unmooring inflationary expectations, though rate trajectory also hinges in the inflation data in the months ahead.”

ANUBHUTI SAHAY, ECONOMIST, STANDARD CHARTERED BANK, MUMBAI:

“While the policy action is in line with expectation, the statement is more hawkish than expected. Inflation still dominates the policy agenda as both core and food inflation remain at elevated level.

“Also as the central bank has once again pronounced the future inflation trajectory as the key factor for monetary policy formulation, more hikes look very likely. We see yet another 25 bps increase in repo rate in the October policy meeting as WPI is unlikely to come below 9 percent before October/November.”

RAMYA SURYANARAYAN, ECONOMIST, DBS, SINGAPORE:

“Hawkish commentary from the RBI suggests they will persist with rate hikes at the next meeting in late-October too. We continue to forecast repo rate rising to 8.50 percent by December 2011.”

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:

“It’s a mild policy action directed towards anchoring inflationary expectations and discouraging banks from borrowing heavily from the RBI’s repo window.

“This time, however, the pass-through will not be across the board but will be bank specific. I don’t expect the RBI to be done with the tightening just yet and the next few weeks’ food inflation data will be very crucial for gauging the further

policy stance. We could likely see another rate increase at the next policy review in October.”

SHAKTI SATAPATHY, ECONOMIST, AK CAPITAL, MUMBAI:

“As expected the rate hike is in line with the pre-policy expectation of 25 bps. The tone of central bank indicates the anti-inflationary stance will remain as priority; change in the current stance will depend on the downward movement in the inflationary curve going forward.

“However, with cumulative impact of earlier rate hikes yet to take place in the later part of the fiscal year, the probability of further rate hikes seems minimal.”

ASHUTOSH DATAR, ECONOMIST, IIFL AT MUMBAI:

“With the just announced fuel price hike, the suppressed inflation should get released to some extent in next 1 to 2 months and unless we see a further rise in global commodity prices, inflation will start to come off by the time RBI gathers for the next policy review late October.

“Also, growth is slowing down and the RBI has highlighted downside risks to its FY12 growth projection. So I expect the RBI to announce a pause on rates in the next review.”

JAYESH MEHTA, MANAGING DIRECTOR AND COUNTRY TREASURER, BANK OF AMERICA MERRILL LYNCH, MUMBAI:

“It is very difficult to take a call what the RBI will do after 45 days with global markets so uncertain every minute. The short-term swap rates will rise, but whether the RBI will continue to pursue its anti-inflation stance will depend on how global developments shape up. The RBI won’t be able to ignore if say Greece defaults.”

NITESH RANJAN, CHIEF ECONOMIST, UNION BANK, MUMBAI:

“While many of us were looking at RBI signaling a pause, I think the hawkish stance is going to continue at least till end of January next year when we will have WPI numbers for December.

“The RBI is still viewing rising inflationary expectation as a key risk after a series of 12 rate hikes. This, according to me, is a real worry so far as rate outlook is concerned.”

A. PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP, MUMBAI:

“The policy rate hike came in line with the expectation of market and looking at the statement it appears that one should not rule out a hike in October as inflation is expected to remain above 9 percent till November.

“The RBI’s focus is steadfast on inflation. By December we expect inflation to come down and hopefully the effect of monetary actions will play out most of next year as inflation comes down to a sustainable level of 6-7 percent.”

MADAN SABNAVIS, CHIEF ECONOMIST AT CARE RATINGS, MUMBAI:

“Persisting with interest hike has been a very pragmatic measure. If the inflation number is high at the time of the next policy, definitely we can expect another increase.

“I think growth will be impacted. Now, probably we will be looking at 7.5-8 percent growth in GDP rather than 8 percent.”

MANISH WADHAWAN, DIRECTOR AND HEAD OF RATE TRADING, HSBC, MUMBAI:

“They have raised concerns on inflation. At the moment the statement looks like that focus is on inflation. I don’t expect the long-end swap rates to rise much from here, but the front-end will remain elevated on further rate hike expectations which could lead to bear flattening of the swap curve.”

MARKET REACTION

· The benchmark 7.80 percent 2021, bond yield rose 4 basis points to 8.36 percent after the policy announcement.

· The benchmark 5-year swap rate rose 4 bps to 6.86 percent, while the 1-year swap rate surged 11 bps to 7.88 percent.

· The main share index trimmed rise to be up 0.4 percent from 1.06 percent beforehand.

· The partially convertible rupee was little changed at 47.45 per dollar from 47.44.

BACKGROUND:

· State-run oil refiners raised petrol prices by nearly 5 percent from Friday, a move that eases their subsidy burden but adds near-term pressure to stubbornly high inflation in Asia’s third-largest economy.

· Annual inflation climbed to its highest in more than a year in August as prices of food and manufactured goods surged.

The wholesale price index rose 9.78 percent, higher than the median forecast of 9.6 percent.

· Food price index rose 9.47 percent and the fuel price index climbed 13.01 percent in the year to Sept. 3, government data on Thursday showed.

· Industrial output growth slumped to 3.3 percent in July, its weakest annual pace in nearly two years.

· Factory sector expanded at its slowest pace in more than two years in August as export orders shrank amid weakening global demand, a survey of manufacturers in Asia’s third-largest economy showed.

· Services sector grew at its slowest pace in more than two years in August, throttled by feeble expansion in new business as a faltering global economy and tight domestic monetary conditions weighed, a survey showed early this month.