RBI may hike interest rates by 1% this year

Foreign lender Royal Bank of Scotland on Thursday said RBI is likely to hike its policy rates by up to one percentage point this year even as the headline inflation is likely to fall to 6-7 per cent on the back of a good monsoon.

According to RBS managing director and head of markets Ramit Bhasin, the apex bank is likely to hike its overnight lending rates (repo) by 0.5 per cent to 6 per cent and the reverse repo, at which it accepts deposits from banks by 1 per cent to 5 per cent in 2010.

The Union Bank of India CMD M V Nair said there is a strong possibility of the Reserve Bank hiking interest rates at its July 27 policy review, as inflation is still very high.

"There is a clear bias for the policy rates to move up for the reason that inflation is still very high and inflationary expectation is to be contained. The bias is going to be upward," Nair, who is also a former chairman of the Indian Banks' Association, said on the sidelines of a BSNL function. Inflation is currently in double digits, led by high food prices. For the month of June, it stood at 10.55 per cent.

"As we go forward, there would be higher capital inflows and the current liquidity crunch will ease much sooner than expected. According to our estimates, RBI is likely to up repo by 0.5 per cent and reverse repo by 1 per cent by December," RBS's Bhasin said.

RBI, burdened with the dilemma of hiking interest rates to check double-digit inflation while supporting economic recovery, is widely expected to up its key policy rates by at least 0.25 percentage point in the quarterly review of its monetary policy, slated for July 27.

The wholesale-price based inflation, which is hovering above 10 per cent for the past five months, is expected to cool down to 6-7 per cent post-December drawing comfort from a good monsoon and the government improving its distribution mechanism, Bhasin said.

RBS, quoting a recent client-survey, said the apex bank is also likely to raise its Cash Reserve Ratio -- the portion of deposits banks have to park with RBI for zero interest -- by 0.25 per cent to 6.25 per cent by end-this year.

The finding assumes significance as most of the economists have ruled out any RBI action on CRR as liquidity conditions are already tight in the system since early June, owing nearly Rs 1.36 lakh crore (Rs 1.36 trillion) outflow for payments for 3G and BWA auctions and advance tax payments.

Bhasin said that 'surprisingly' nearly 8 per cent of the survey respondents felt the central bank would keep its key-rates untouched because of the uncertain global conditions.