E038;Y sees 25 bps rate hike by RBI

Ernst amp; Young India said the high double-digits July IIP numbers is likely to goad RBI.

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Ernst amp; Young India said the high double-digits July IIP numbers,coupled with rising inflationary pressures and comfortable liquidity,is likely to goad RBI to further raise the key policy rates by at least 25 basis points in the mid-quarter review on Thursday.

Eamp;Y India National Leader for Global Financial Services Ashvin Parekh said here,8221;At 13.8 per cent the July IIP numbers are indeed very encouraging. And going by this number,it is very clear that there will surely be an upward correction in the demand for funds in the coming months. This in turn will lead the RBI to further hike the repo and reverse repo or short-term lending and borrowing rates by 25 bps in the September 16 review.8221;

In the first quarter Monetary Policy Review on July 27,the RBI had hiked repo rate by 25 bps to 5.75 per cent and reverse repo by 50 bps to 4.5 per cent,while leaving the cash reserve ratio unchanged at 6 per cent. This was fourth successive hike since the January policy review.

Parekh,however,felt that there is no room for the central bank to take a harder than 25 bps hike as the inflationary pressures are waning now,thanks to the efficient supply side management by the government in the recent months.

Food inflation for the week ended August 28 stood at an elevated 11.47 per cent after falling to under 10 per cent in early August,while the general inflation based on wholesale prices,had declined to single digit in July at 9.97 per cent,after being in double-digits for five months. August inflation figures are expected tomorrow.

8220;Beginning next month,the now low credit offtake will get a major fillip with the corporates increasing their capacity addition as well as expansion. Going by our estimate,the economy is expected to log in 9 per cent growth this fiscal and to achieve that,companies have to expand their capital expansion plans aggressively,8221;,he said.

8220;I see the index of industrial production IIP clipping at 14-15 per cent through the rest of the months on the back of an expected 20 per cent capital expansion by the corporates through the rest of the fiscal,8221; Parekh said,adding the optimism among companies will have a multiplier effect of pumping up the credit offtake,which so far has been mute.

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As of end-August,the credit growth has been a tepid 18 per cent against the industry8217;s as well the RBI8217;s projection of 22 per cent. Last week SBI Chairman O P Bhatt had said that 8220;at around 18 per cent,credit offtake has not been matching the expectation of the bankers and the RBI.8221;

Further explaining the rationale for a rate hike,Parekh said,the RBI move to deregulate savings and current accounts CASA deposit rates will automatically see that the cost of funds would go up.

8220;I see an up to 75 bps jump in the cost of funds for banks as and when savings rates are deregulated,8221; Parekh said,and argued that there is a huge gap in savings account and fixed deposit rates now.