Analysts divided over RBI move on Friday

There are different data pointing at different actions which the RBI can take.

Conflicting macroeconomic data on inflation and factory output have made the analysts and economists a divided house on the direction that the Reserve Bank will take on Friday at its mid-quarter policy review.

“There are different data pointing at different actions which the RBI can take,” ratings agency Fitch Associate Director D K Pant said.

The Reserve Bank has increased its key policy rates a record 11 times since March 2010 to tame the uncomfortably high inflation. The last of the hikes was a higher-than-expected 50 basis points hike on July 26. Headline inflation for July had stood at 9.22 per cent,much above the central bank’s comfort level. However,the July IIP data released yesterday showed a steep decline in factory output,which plunged to a two-year low to 3.3 per cent. Crisil Chief Economist DK Joshi said in spite of the poor IIP numbers,he expects RBI to spike key rates by 25 bps on Friday.

“We are towards the end of the rate hike cycle but I feel there will be a 25 bps hike…this could be the last one,” he said.

However,investment bank Goldman Sachs said it expects the central bank to pause. “We think the reasons to pause outweigh the reasons to hike,” as domestic demand has been weakening significantly due to the repeated hikes which has been reflected in the IIP data while inflation has come off sequentially,even though it looks high on an annual basis. When asked for his expectations from the policy,Pant said all depends on the August inflation data due tomorrow. “Apart from the overall number,RBI will closely see the data on manufacturing inflation and non-food manufactured inflation specifically,” he said,adding if the data point to a grim situation,RBI will hike rates one more time.