New Delhi: The Reserve Bank of India (RBI) may go in for yet another hike of key interest rates by 25 basis points at its policy review later this week to prevent food inflation from spreading to the manufacturing sector, say economists.
With inflation rising marginally to 8.31% in February, experts feel the RBI could announce 25 basis point hike in its short-term lending (repo) and borrowing (reverse-repo) rates.
“RBI may raise key policy rates by 25 basis points to arrest food inflation spreading to manufacturing sector”, Crisil chief economist D. K. Joshi said.
Expressing similar views, ICRA economist Aditi Nayar said, “We continue to expect that the RBI may increase repo and reverse repo rates by 25 basis points in the upcoming mid-quarter policy review”.
Since March, 2010, the central bank has raised repo and reverse-repo rates seven times to check inflation.
“The RBI will release its next Mid-Quarter Review of Monetary Policy 2010-11 at 12 noon on 17 March, 2011”, said a central bank release.
Inflation, which inched up from 8.23% in January to 8.31% in February, was much above the comfort level of 5-6%.
During February, food inflation, which accounts for over 14% of overall wholesale price index (WPI) inflation, stood at 10.65% on a year-on-year basis.
Besides inflation, RBI will also take into account the sluggish industrial performance and impact of political unrest in the West Asia and North African region on crude oil prices while reviewing its monetary policy.
Industrial growth slowed to 3.7% in January this year, compared to 16.8% expansion in the year-ago period, dragged down by the poor performance of the manufacturing sector, particularly capital goods.
Since March 2010, central bank hiked repo rate by 175 basis points and reverse repo rate by 225 basis points.
In its last review of the monetary policy on 25 January, 2011, RBI had hiked short-term lending and borrowing rates by 0.25% each.
The repo and reverse repo rates now stand at 6.5% and 5.5%, respectively.
In a tacit admission that the RBI is struggling to balance its dual objectives of taming inflation and encouraging growth, governor D. Subbarao had recently said, “For inflation management we have to raise policy interest rates.
For protecting, promoting, and preserving recovery we need to keep interest rates low, so there is tension between raising policy interest rates and keeping them low.”