New Delhi: High food inflation is most likely to weigh on the Reserve Bank of India (RBI), which is widely expected to raise key policy rates by at least 25 basis points (bps) in its monetary review due on Tuesday, top bankers said.
“Conventional wisdom says that there should be at least 25 basis point hike in interest rate,” said State Bank of India chairman OP Bhatt.
Despite moderating for two weeks, food inflation is still very high at 15.52% on account of rising prices of essential items like vegetables, particularly onion and tomato, fruits, milk and eggs.
Finance minister Pranab Mukherjee had expressed concern over food inflation saying, “some of the vegetable prices are still high.”
Though analysts are not sure whether any further tightening of interest rate can check the price rise, the central bank seems to have few options but to hike rates.
It is to be noted that RBI chose not to tinker with the policy rates during the last review in December even though food inflation was in double digits.
The stubbornly high food inflation rate may prompt RBI to tighten money supply by raising both short-term lending (repo) and borrowing (reverse repo) rates.
Endorsing the widespread view, HDFC Ltd chairman Deepak Parekh said RBI is expected to raise key short-term rates by 25-50 basis points.
“The RBI may be looking at an increase (of short-term rates) at 25-50 basis points... But I personally feel that interest rates are already high and it will impact the growth of retail loans and housing,” Parekh said.
Even, Dena Bank chief said that the central bank would raise rates by 25 basis points.
“I do feel the RBI will go in for some kind of rate hike, may be around 25 basis points,” said Dena Bank chairman and managing director DL Rawal.
Last week, RBI governor D Subbarao said the country was facing surging inflation and that monetary policy needed to be calibrated to manage it as well as support growth.
“For the Reserve Bank the challenge is to calibrate monetary policy taking into account the demands of inflation management and the demand of supportive recovery,” he said.
According to Punjab & Sind Bank executive director PK Anand, it is expected that the central bank would raise policy rates to rein in inflation. As much as 25 basis points hike by RBI has already been discounted by the market.
Last year, RBI had raised its repo and reverse repo rates six times to 6.25% and 5.25% to normalize a monetary policy that was on expansion mode since the onset of the global financial meltdown in late 2008.