RBI may hike key policy rates till Jan 12: Experts

The Reserve Bank, on Friday, hiked its key rate by 25 basis points, the 12th time since March last year, to tame high inflation overlooking sliding growth.  The short-term lending (or repo) rate to banks by RBI stands revised to 8.25 per cent, while the borrowing (reverse repo) rate is set at 7.25 per cent.

Industry experts project the WPI inflation, which rose to 9.78 per cent in August, much higher than the RBI’s comfort level of 5-6 per cent, to remain above 9 per cent level until December this year.

The next policy review is due on October 25. According to a research report by global banking giant Standard Chartered, “RBI will increase the policy rates by 25 basis points at the October policy as well. If anything, the tone of the policy statement keeps the door open for further rate hikes after October.”

“We do not rule out further rate hikes up to January 2012,” brokerage firm Angel Broking said in a research note. Rating agency Care expressed similar views. “RBI is likely to continue with its anti-inflationary stance till the year end,” it said.

Brokerage firm Elara Securities also expects the central bank to further raise policy rates by 25 basis points in the October policy review. “If the domestic inflation scenario does not worsen and macroeconomic scenario stabilises at current levels, we view rates peaking at 8.5 per cent,” the report said.

More rate hikes by the Central Bank are in store as the RBI in its mid-quarterly review of monetary policy has cautioned that the current level of high inflation makes it imperative to continue with the anti-inflationary stance and tight monetary policy. The future monetary policy stance, it said, would depend on the level of inflation.

The RBI has raised rates by a total 350 basis points since March 2010. Despite this, the inflation has stubbornly remained near double digit, while the first quarter GDP slipped to 7.7 per cent from 8.8 per cent a year ago.

Standard Chartered, however, believes that India is only using one policy lever, increase in interest rates, to counter inflationary pressures, and there is very little emphasis on other policies. “Fiscal policy remains accommodative and might have contributed substantially to demand-side pressures in the recent past,” it said.