Mumbai: The RBI may raise its main short-term lending rate or repo rate by 25 basis points and allow its currency to gain to slow inflation, which is running near three-year highs, Bank of America said in a note.
“While the Reserve Bank of India (RBI) will likely reiterate the need for heightened vigilance against threats to financial stability, maintaining price stability and moderating inflation expectations will take precedence in the near-term,” Han-Sia Yeo, strategist at the bank wrote in a note on Thursday.
The central bank meets for a scheduled review on 29 April.
Wholesale price inflation is running at a near-three year peak of 7.33% in mid April.
“In our view, the intensifying price pressures will likely see RBI increasingly tolerant towards a stronger rupee,” he said.
It expects the rupee to rise to 39 in the second quarter of 2008. It was trading at 40.20/21 on Friday.
“Admittedly, currency appreciation is not an effective tool in tackling supply-side issues driving food inflation, but a stronger rupee should nonetheless provide a short-term ease in price pressure on non-food commodities,” he said.
The RBI will keep reserve requirements unchanged after unexpectedly raising it by 50 basis points last week to drain surplus inflation-fuelling cash from the system, he said.
Overnight rates are expected to drift up to 8% by the second half of May, he added.
“The higher repo rate will send a clear signal on RBI’s resolve on maintaining price stability and for banks to raise lending rates,” the report said.
“On the other hand, the unchanged floor rate of 6% would facilitate a swift easing of liquidity conditions in the event of any unanticipated reversal in capital flows,” it said.