Costlier food may impact RBI rates, says Stanchart

Costlier food may impact RBI rates, says Stanchart

Mumbai: The Reserve Bank of India may raise its key policy rates by 25 basis points in January, earlier than previously thought, to tame accelerating inflation, Standard Chartered Bank said on Wednesday.

The bank sees India’s wholesale price index-based inflation near 7% before the RBI meets to review policy on 29 January. It also raised its inflation forecast to 8.5% by end-March 2010 from 7%.

“There will be further pressure on the RBI to act because there have been few innovative steps on the fiscal side to tackle food price inflation," analyst Samiran Chakraborty wrote in a note.

“Monetary action would, to some extent, reduce the clamour over rising prices which is growing uncomfortable for the government."

Standard Chartered had earlier said the RBI may tighten liquidity by raising the amount banks have to keep in deposit with the central bank by 50 basis points before the 29 January policy review but had not seen a hike in policy rates.

India’s wholesale prices rose a faster-than-expected 4.78% in November, with the food price index soaring 16.7%. The headline number is higher than October’s 1.34% rise and faster than a Reuters poll of 4.14%.

Finance minister Pranab Mukherjee said on Tuesday India would take measures to tame rising prices and enable the economy to recover faster, but did did not elaborate on the steps planned.

Standard Chartered said it expected an exit from monetary stimulus to be gradual because growth indicators were undergoing a phase of tentative recovery and any significant tightening may derail this recovery.

The RBI’s repo rate, at which it injects cash into the system, currently stands at 4.75% while the reverse repo rate, at which it absorbs cash, is 3.25 percent. The cash reserve ratio (CRR) is at 5%.

The central bank had cut its policy lending rate by 425 basis points between October 2008 and April 2009, slashed CRR and pumped in liquidity in financial markets to revive the economy hit hard by the global slowdown.