RBI likely to raise rates again by 25 bps to check inflation

With inflation remaining stubbornly high at 9.78 per cent for August, bankers and economists expect the central bank to continue with hawkish monetary policy and hike rates again at the mid-quarterly credit policy review on Friday.

RBI has raised interest rates 11 times since March 2010 to check the rate of price rise, but inflation has remained much above the central bank's comfort level of 5-6 per cent.
"The current rate of inflation would put pressure on RBI to further tighten monetary policy. There could be a hike of 25 basis points in key rates by RBI," Oriental Bank of Commerce Executive Director S C Sinha said.

Expressing similar opinion, Standard Chartered senior economist Anubhuti Sahay said, "Moderation in growth is not yet broad-based. As inflation control remain the central bank's major agenda, we think it is likely to go in for another hike of 25 basis points in key-policy rates."

However, while raising the rates, RBI will have to take into account its impact on economic as well as industrial growth, which slipped to 21-month low of 3.3 per cent in July. Economic growth in the April-June quarter stood at 7.7 per cent, lowest in six quarters.

In view of the sliding growth, industry chambers have urged RBI to refrain from hiking interest rates but the central bank, economists feel, will give precedence to inflation control before growth in its policy review.

Earlier this week, State Bank of India Chairman Pratip Chaudhuri said, "There could be (rate hike by RBI). Inflation is still not under control."

RBI is chasing inflation and till such time it is contained, the central bank will continue with tight monetary policy stance, Chaudhuri said.

Economists further said that the weakening of the rupee against the US dollar was bad news for policy makers grappling with inflation.

"The recent depreciation of the rupee relative to the US dollar would exert pressure on the prices of imported items... Accordingly, we expect the RBI to persist with monetary tightening and hike the repo rate by 25 basis points in the upcoming policy review, despite the sluggish industrial growth," ICRA economist Aditi Nayar said.

While inflation in recent past was more driven by local demand factors, experts say that high international commodity prices are adding to the problem.

"There are not enough policies to ease supply side pressure and inflation is expected to remain high in the near future," Sahay said, adding that before the interest rates peak, there could be yet another revision in October.

"I think there would be some rate hike this week and could be some more in October policy if inflationary expectations are not anchored," Indian Overseas Bank Chairman and Managing Director M Narendra said.

Corporation Bank Chairman and Managing Director Ramnath Pradeep said it is expected that the RBI will further hike interest rates.

"If policy rates go up it will put pressure on banks to raise interest rates, both lending and deposit rates," he said.