RBI likely to raise rates by 25 basis points

Amidst high food inflation, falling industry output and uncertain crude oil prices, the Reserve Bank is likely to raise key policy rates by 25 basis points in its mid-quarterly review tomorrow, say experts.

The RBI is expected to hike interest rates by 25 basis points, said State Bank of India chief finance officer Hemant Contractor.

Despite moderation, food inflation is still high at 9.52 per cent on account of rising prices of essential items. At the same time, factory output grew by 3.7 per cent in January compared to 16.7 per cent in the same month a year ago.

"Current growth and inflation trends clearly warrant that we persist with the anti-inflationary monetary stance. Looking beyond 2010-11, the Reserve Bank expects the domestic growth momentum to stabilise," RBI Governor D Subbarao had said in the last policy review announced on January 25, 2011.

"Inflation is expected to moderate from the first quarter of 2011-12, but several upside risks are already visible. The monetary stance will be determined by how these factors impact the overall inflationary scenario," the Governor had said.

Wholesale price based inflation inched up to 8.31 per cent in February, against 8.23 per cent in January.

RBI has raised policy rates seven times since March, 2010, with a hike of 175 basis points in short-term lending (repo) rate and 225 basis points in short-term borrowing (reverse) repo rate in its bid to arrest inflation.

Though analysts are not sure whether any further tightening of interest rate can check the price rise, the central bank seems to have few options but to hike rates.

"RBI is unlikely to raise rates in the upcoming policy review," said Corporation Bank chairman and managing director Ramnath Pradeep.

It is to be noted that RBI chose not to tinker with the policy rates during December, 2010 review, even though food inflation was in double digits.

"RBI till now has clearly communicated the stance that they want to balance between growth and inflation. That's why they want to take a calibrated stance to raise rates. From that perspective, 25 basis points hike seems to be on the cards," said Standard Chartered Head (Research) Samiran Chakrabarty.

Echoing a similar view, Crisil Chief Economist D K Joshi said: "RBI may raise key policy rates by 25 basis points to arrest food inflation spreading to manufacturing sector."