RBI may hike rates, says bankers

With inflation moving closer to the double-digit mark, bankers expect the Reserve Bank to increase its key policy rates by 25 basis points in the upcoming policy review on Friday.

As long as inflation does not decline to a significant level, the Reserve Bank of India (RBI) would continue its tight monetary stance. The general view is that RBI would go in for another rate hike as inflation is hovering around the double-digit mark, Indian Overseas Bank Chairman and Managing Director M Narendra said.

“I think there would be some rate hike this week and could be some more in October policy if inflationary expectations are not anchored,” he said.

RBI, which is scheduled to review interest rate policy again on September 16, faces a dilemma of sorts as the Indian economy is confronted with high inflation and sliding growth.

It raised interest rates 11 times in last 18 months to tame inflation.

Inflation climbed to 13-month high of 9.78 per cent in August suggesting that frequent interest hikes by RBI since March 2010 has proved ineffective to contain price rise.

Inflation, based on the Wholesale Price Index, went up from 9.22 per cent in July. The near double-digit inflation in August is highest since July 2010, when it was 9.98 per cent

Corporation Bank Chairman and Managing Director Ramnath Pradeep said it is expected that the RBI will further hike interest rates.

“If policy rates go up it will put pressure on banks to raise interest rates, both lending and deposit rates,” he said.

Echoing similar views, Oriental Bank of Commerce Executive Director S C Sinha said, “The current rate of inflation would put pressure on RBI to further tighten monetary policy.

“There could be a hike of 25 basis points in key rates by RBI,” Mr. Sinha said, adding, this would result in loans becoming more expensive in coming days.

It may be noted RBI in the last policy review in July raised the short-term lending (repo) rate by a surprise 50 basis points to 8 per cent and the short-term borrowing (reverse repo) rate by a same margin to 7 per cent.