Reserve Bank may go for a rate hike smaller than 0.25 per cent: SBI

Reserve Bank Governor Raghuram Rajan may raise rates in the apex bank's monetary policy statement on Tuesday, April 1, which could be smaller than 0.25 per cent, according to a report by State Bank of India (SBI).

At present, India's economic situation does not warrant any rate hike in the forthcoming monetary policy announcement for the next fiscal year (2014-15), SBI's economic research department said.

However, since the Reserve Bank of India (RBI) has surprised the markets in past few policies, there is a possibility of rates going either side, but with a larger probability of a rate hike, the report said.

"We also believe that in case the rate hike takes place, there is also a possibility of a hike of smaller magnitude than 0.25 per cent that in itself will be a surprise," it said.

The new operating procedures laid down in the Urijit Patel committee report on monetary policy-making recommends a flexible inflation targeting (FIT) and proposes a transition period of 2 years to FIT regime.

The report said that the arguments for recommending the Consumer Price Index (CPI) as a nominal anchor, and that setting a retail inflation (CPI-based inflation) target of 2-6 per cent in the medium term is a radical step and can be seen as a sincere endeavour against the backdrop of a stubborn inflation since FY11.

"The choice of CPI is well reasoned and logical, largely guided by such transitions in other emerging market economics, except China," the report noted.

However, the report said that inflation targeting per se in a country like India will face some key operational challenges as it will require close co-ordination with the government.

It said that post the financial crisis, there are renewed thoughts now regarding the efficacy of a blanket inflation targeting, and the focus has shifted to financial stability.

The report pointed that global monetary imbalances may constrain the migration to FIT regime in coming two years.

Global liquidity overhang and global monetary imbalance may continue to fuel inflation including asset prices as is already evident from the relentless march of yellow metal from West to East in latest World Gold Council report, the SBI report pointed out.

It further said the linking factor for successful flexible inflation targeting is gold and the committee is silent of this aspect.

On monetary policy committee (MPC), the report believes that the composition of MPC as mandated in Patel Committee report should have been more broad-based, with even representation from the Government to have better monetary and fiscal policy interlink age.