RBI may hike policy rates by 25 bps on Tuesday

[1]

The Reserve Bank of India (RBI) is likely to raise key policy rates by 25 basis points in its monetary policy review on Tuesday as inflation is expected to remain near double-digits for the next two quarters, a survey reveals.

The central banks is expected to hike the repo rate, or the rate at which banks borrow money from the RBI, by 25 basis points, according to a survey conducted among 13 economists and financial analysts by the Federation of Indian Chambers of Commerce and Industry (FICCI).

If it does that, it would be the 11th rate hike since March 2010 and could result in commercial banks passing on the increase to its lenders - making loans to individuals as well as companies that much costlier.

In its last review, the RBI had hiked the short-term lending rates by 25 basis points in a bid to curb inflation and indicated that more such increases were in the offing.

However, most economists surveyed fell that the RBI could be nearing the end of the current monetary tightening cycle.

"With signs of a slowdown in the interest rate in sensitive sectors now being quiet evident and the demand for term loans, which is a proxy for capital expenditure, slackening, the survey respondents feel that RBI could consider changing its stance from aggressive monetary tightening to a neutral one going forward," FICCI said.

The survey points out that despite an aggressive monetary tightening policy, the RBI has not been able to control inflationary pressure.

In March 2010, when the RBI started to raise policy rates in the current rate hike cycle, the headline inflation based on wholesale price index was 10.4 per cent. Even after 10 times rate hikes the headline inflation stood at 9.4 per cent in June 2011.

According to the seventh round of FICCI's Economic Outlook Survey, conducted July 7-19, continuous policy rate hikes by RBI have taken a toll on the growth of several sectors, eventually leading to a drop in industrial output and and GDP growth estimates.

The survey puts the economic growth projection for the current fiscal at 7.9 per cent as against the government's estimate of 9 per cent (plus/minus 0.25 per cent).

The industrial output is expected to grow at 7.3 per cent in fiscal 2011-12.