Yaga Venugopal Reddy proved his penchant for surprising the street once again by hiking the much-used cash reserve ratio. Economists say he's not done yet.
They are forecasting that Reddy will wield his favourite —- and blunt —- weapon more often as the inflation battle gets murkier in the next few months.
At the annual monetary policy review on Tuesday, Reddy announced a 25 basis points CRR hike effective May 24.
The is the second hike in April after the 50 basis point hike on April 17.
Economists are predicting more CRR hikes because they expect inflation to surge in the next couple of months.
Robert Prior-Wandesforde, India economist at HSBC, said the wholesale price index will hit 8% later this year, prompting the RBI to step up its fight.
"The RBI is clearly intent on sending a strong signal that it views inflation as uncomfortably high and is prepared to back up the government's various measures (such as scrapping import duties on edible oils and maize as well as banning exports of rice, pulses and cement) with monetary action of its own…..against this background, the danger is that further policy tightening will be forthcoming," Wandesforde wrote minutes after the monetary policy was announced.
The CRR rate hike was not expected among economists before the policy.
Analysts were equally divided among those which expected no change in rates and those that expected a repo rate hike.
Tushar Poddar, India economist at US investment bank Goldman Sachs, expects the tightening bias in the policy will continue in the near term.
"The reduction in broad money growth will entail more tightening, possibly through further CRR hikes. The current CRR hike and prospects for more will be negative for banks as it would hurt their margins," Poddar wrote after the policy.
Broad money supply or M3 is running high at over 20%. The RBI's target is to bring it down to at least 17%, which will mean sucking out more extra money from the banking system.
However, economists also warn that further rate hikes by the RBI is likely to impede growth in the short term, while at the same time not being an instant medicine for inflation cure.
Lehman Brothers' India economist Sonal Varma, expects growth to be "quite a bit weaker than the RBI expectation of 8-8.5%. "We expect at least one more 50bp hike in CRR in 2008," Varma said after the policy.
"If further tightening is forthcoming then we will need to think seriously about downgrading our 7.8% growth projection for 200910 (given the lags with which policy operates it will have little impact on 200809, where we expect growth to average 7%)," Wandesforde said.
They are forecasting that Reddy will wield his favourite —- and blunt —- weapon more often as the inflation battle gets murkier in the next few months.
At the annual monetary policy review on Tuesday, Reddy announced a 25 basis points CRR hike effective May 24.
The is the second hike in April after the 50 basis point hike on April 17.
Economists are predicting more CRR hikes because they expect inflation to surge in the next couple of months.
Robert Prior-Wandesforde, India economist at HSBC, said the wholesale price index will hit 8% later this year, prompting the RBI to step up its fight.
"The RBI is clearly intent on sending a strong signal that it views inflation as uncomfortably high and is prepared to back up the government's various measures (such as scrapping import duties on edible oils and maize as well as banning exports of rice, pulses and cement) with monetary action of its own…..against this background, the danger is that further policy tightening will be forthcoming," Wandesforde wrote minutes after the monetary policy was announced.
The CRR rate hike was not expected among economists before the policy.
Analysts were equally divided among those which expected no change in rates and those that expected a repo rate hike.
Tushar Poddar, India economist at US investment bank Goldman Sachs, expects the tightening bias in the policy will continue in the near term.
"The reduction in broad money growth will entail more tightening, possibly through further CRR hikes. The current CRR hike and prospects for more will be negative for banks as it would hurt their margins," Poddar wrote after the policy.
Broad money supply or M3 is running high at over 20%. The RBI's target is to bring it down to at least 17%, which will mean sucking out more extra money from the banking system.
However, economists also warn that further rate hikes by the RBI is likely to impede growth in the short term, while at the same time not being an instant medicine for inflation cure.
Lehman Brothers' India economist Sonal Varma, expects growth to be "quite a bit weaker than the RBI expectation of 8-8.5%. "We expect at least one more 50bp hike in CRR in 2008," Varma said after the policy.
"If further tightening is forthcoming then we will need to think seriously about downgrading our 7.8% growth projection for 200910 (given the lags with which policy operates it will have little impact on 200809, where we expect growth to average 7%)," Wandesforde said.
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