The `surprise' hike

Markets may not like surprises. But that disapproval rarely, if ever, deters central bankers from giving them a jolt every now and then. Act when it is unexpected and sit tight when it is expected, seems to be the unspoken central banking mantra. And Dr Y.V. Reddy has exercised this skill with practised deftness.

The last three hikes in policy rates, coming in rapid succession, in December 2006, February 2007 and the latest one on Friday have happened outside the conventional policy announcements or quarterly reviews. Economists have explained that hiking the Cash Reserve Ration is a comparatively cheaper way to suck out liquidity generated by huge capital inflows (rather than issue more bonds). Forex reserves have gone up by $20 billion in the last three months alone.

Immediate re-pricing of deposit and loan rates by private banks has invariably followed past hikes in these rates. Public sector banks have responded with a little lag. One more round of hikes for home loan borrowers and car loan borrowers seems inevitable now.

Dr Reddy had said at the start of his press conference immediately after the last quarterly review in January 2007, "The surprise this time was that there was no surprise." By now, press persons and the markets must have got used to the fact that the "surprise" is always just around the corner