RBI likely to raise policy rates tomorrow

The Reserve Bank (RBI) will try to put the lid on inflation, which is nearly in the double-digit region, possibly by hiking key rates in its annual monetary policy tomorrow, feel bankers.

The apex bank, however, may not be too aggressive in tightening the monetary policy and is likely to resort to only a moderate 0.25 percentage point hike in short-term borrowing rates and mandatory bank deposits with RBI.
moderate tightening should suffice because inflation is expected to ease after the rabi (winter) crop, including wheat, sugar, potatoes and pulses, reaches the market, around mid-May.

Wholesale prices-based inflation touched 9.90 per cent in March, mainly fuelled by high food inflation. The bankers said too much caution on the monetary front may also hamper economic recovery.

Economic activity has seen revival and factory production rose by a stellar 15.1 per cent in February, the fifth straight month of double-digit expansion, riding largely on the back of fiscal and monetary stimulus measures announced by the government and RBI in the wake of the global financial crisis.
Repo and reverse repo are the key short-term lending and borrowing rates, respectively, while Cash Reserve Ratio is the money that every bank has to mandatorily keep with the central bank. Also, industry sources said that banks are not likely to raise lending rates, at least immediately, even if RBI hikes rates by a quarter percentage point as liquidity is sufficient in the near term.

"The RBI is likely to hike the rates by anywhere between 0.25-0.50 percentage point as the inflation situation warrants monetary action.
The apex bank began unwinding its monetary stimulus by upping the CRR by 0.75 percentage points in January and policy rates (repo and reverse repo) by 0.25 percentage points in March to cool inflation.

The hike is certain given the current inflation conditions and signs of the economic recovery. "I expect that CRR will be hiked by 0.25 per cent as the focus of the central bank now is to bring down inflation.