RBI may hike key policy rates by 25 bps tomorrow: Bankers

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With inflation hovering much above the comfort zone, the Reserve Bank of India (RBI) may raise key policy rates by 25 basis points in its first mid-quarterly review of the credit policy for FY12 on Thursday.

"I think the RBI would take one more small step to curb inflationary expectations. Market is expecting a 25 basis points increase," the Indian Overseas Bank chairman and managing director, Mr M. Narendra, said.

One thing is certain: inflation is beyond the comfort level and the RBI has already expressed its concern on many occasions, he said.

In its annual policy document for 2011-12 released in May, the RBI had said that inflation control would be its primary focus in the near future, even as it agreed that the high rate of price rise would impact the country's growth story.

"Given the inflation condition, the general consensus is that RBI would raise rates by 25 basis points," said Punjab & Sind Bank executive director, Mr P.K. Anand.

For the month ended May, inflation moved up to 9.06 per cent from 8.66 per cent in the previous month, mainly on account of a rise in the price of manufactured products.

According to IDBI Bank executive director, Mr R.K. Bansal, rising inflation numbers have raised the expectations of a rate hike by the RBI.

"My feeling is that the central bank could further raise rate by 25 basis points," Mr Bansal said.

The RBI has hiked key policy rates nine times since March, 2010, and is likely to continue with its tight monetary policy stance to tame inflation, which is edging toward double digits.

The central bank, in its annual policy, had accepted that inflation would remain a matter of major concern in the next few months on account of high global commodity prices, particularly of crude.

Analysts feel that repeated rate hikes have led to dwindling investment, which is turn has led to a slowdown in economic expansion.

During the January-March quarter, the Gross Domestic Product (GDP) expanded by only 7.8 per cent, the slowest pace of growth in five quarters.

At the same time, factory output -- as measured by the Index of Industrial Production (IIP) -- grew by only 6.3 per cent in April, as against 13.1 per cent in the corresponding period last fiscal.

However, the central bank's priority would be to check price rise, analysts said.

According to IndusInd Bank executive vice-president, Mr Moses Harding, headline inflation shooting past the 8.5-9 per cent tolerance zone in May has set off alarm bells. There is now extreme pressure on the RBI to continue with its rate hike actions and maintain the repo rate as the operative policy rate for an extended period of time.