RBI to hike key rates soon: Economists

With the economy heading for a double-digit inflation due to the spiralling food prices and costlier fuels and manufactured articles, the Reserve Bank is expected to hike its key policy rates next month, say leading economists.

The apex bank is likely to increase the repo and reverse repo rates at which it lends and borrows by 0.25-0.5 per cent at the forthcoming annual monetary policy next month, they said.

"The high inflation surely calls for a rate hike, even if it is food-driven. The RBI is likely to act by hiking the repo and reverse repo rates by at least 0.25 per cent at its April policy," Crisil principal economist Dharmakriti Joshi said.

The WPI-based inflation, which has already neared 10 per cent, is likely to stay in double-digits till June and may ease after that, Joshi told PTI.

Driven by the soaring food prices, costlier fuels and manufactured goods, the wholesale inflation shot up to a 16-month high of 9.89 per cent in February while the food inflation is currently hovering near 18 per cent.

Unwinding from its easy money stance, the RBI had hiked the CRR or the portion of cash banks need to park with the central bank, by 0.75 per cent to 5.75 per cent in its third quarter policy review on January 29, but kept the key rates unchanged.

Bank of Baroda chief economist Rupa Rege Nitsure said the headline inflation is likely to touch 11 per cent in March and stay in double-digits till May-June--until the Rabi crops reach the markets.

My feeling is that both the repo and reverse repo rates are likely to be increased by 0.5 per cent as the current high inflation warrants such an action," Nitsure of Bank of Baroda said.

Given the high food prices and supply-side constraints, the WPI-based inflation is likely to spiral up in the coming few months, Nitsure said. In its January policy review, the RBI had projected the WPI-based inflation at 8.5 per cent by March.

On Tuesday, finance minister Pranab Mukherjee had cautioned that inflation could touch the two-digits mark in the coming months but gave an assurance that the government will take the required steps to contain the prices.

Indusind Bank's global markets group head Moses Harding, however, has a different view on the matter. According to Harding, the current inflation does not call for any 'panic' reaction from the central bank as food prices are likely to subsidise in the months ahead resulting in a decline in the inflation numbers.

He also feels that even if the apex bank hikes the policy rates, this will not affect the banking system in a large way.

"There is no need for panic. Even if the central bank raises the rates by 0.5 per cent, the market can absorb that. The market has already discounted the fears (of any possible rate hike)," Harding pointed out.