RBI may hike repo by 25 bps, reverse repo by 50 bps: Mint

In an interview with CNBC-TV18, Tamal Bandyopadhyay, Deputy Managing Editor, Mint spoke about today’s RBI meet and his reading of the likely outcome from it.

Below is a verbatim transcript of the interview. Also watch the video.

Q: A poll conducted by us among bankers finds that a majority expect a 25 bps hike in the key policy rates tomorrow. Which camp are you part of?

A: I would also largely think on that line—25 bps at least. But where I differ with the bankers is when most of them are expecting a 25 bps each—both in reverse repo and repo—but I would think this is a time to narrow the corridor, which means 25 bps repo, but 50 bps for reverse repo. The logic behind this is repo is a rate at which RBI infuses liquidity in the system. So when you have tight liquidity repo the upper end becomes a rate but when the liquidity is ample or sufficient in the system then reverse repo rate becomes the policy rate.

If you are absolutely sure that from now on the liquidity will continue to be tight everyday then it makes sense to have an identical hike on both the policy front but if the liquidity returns for few days then the reverse repo becomes the rate and at that time you find reverse repo is too low a rate. Ideally, it should hike the reverse repo by a higher percentage points say by 50 bps and repo by 25 bps, I will not be surprise if that happens.

Q: If any of these possibilities happens would that lead to an immediate HIKE in lending rates by banks?

A: This will be a real test for the base that the banks introduced in the beginning of July. Ideally they should but many banks have been saying till not the credit growth has not been the kind of credit growth they were expecting which is quite surprising because overall the industry goes 21% odd but quite a few banks have been saying that credit growth is not been that much and on the other side of it the kind of indirect pressure that comes from government and other not to hike the rate immediately.

So if it’s a 25 bps hike maybe they would wait till according to them the credit actually picks up a few weeks before taking a call, there may not be any immediate hike, that’s possible.

Source: http://www.moneycontrol.com/news/economy/rbi-may-hike-repo-by-25-bps-reverse-repo-by-50-bps-mint-_472588.html