A Rate hike in the making?

It's not about an interest rate cut any more. Rather the question is when will the Reserve Bank of India (RBI) raise rates? Minutes of the April 6 monetary policy committee meeting released last week showed that five of the six members, except Ravindra Dholakia, expressed concerns on inflation, citing varied reasons from higher house rent allowances, increase in taxes due to the new GST, volatile weather conditions due to a possible El Nino, firming global commodity prices and inflation from protein-rich items other than pulses.

Economists say that the minutes indicate that the central bank's the next move will be an increase in interest rate, possibly as early as next year.

March consumer inflation increased to 3.81% from 3.65% in February, but was well within RBI's 5% target for the fiscal year ended March 2017. However, the central bank's stated medium term target is to keep inflation at 4%. The RBI's own projection for the current fiscal year ending March 2018 is for inflation to rise to 4.5% in the first half and further to 5% in the second half.

Expectations also are that RBI's rate hike cycle could begin by an increase in the CRR as the central bank grapples with Rs.4 lakh crore of excess liquidity in the banking system currently .

On April 13, RBI announced the sale of  Rs.1 lakh crore of treasury bills to suck out excess liquidity from the banking system through the so-called market stabilisation scheme. This after it had raised its reverse repo rate, the rate at which banks park excess funds with it, by 25 basis points to 6%.

Bond yields have already moved higher anticipating a rate hike. From a low of 6.20% in December, the benchmark 10-year bond yield touched a high of 6.96%.

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