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Bankers see rate hike

Mumbai, Jan. 23: Bankers expect the Reserve Bank of India to increase key short-term rates by 25 basis points in its monetary policy on Tuesday. The apex bank may also raise its inflation forecast for March 2011.

A hike in the repo and reverse repo rates has already been factored in by the markets as inflation is well above the central bank’s comfort level, and the pressure is unlikely to ease given the spike in crude oil prices.

The reverse repo is the rate at which the RBI absorbs liquidity from banks, while the repo is the rate at which it lends money to the banks.

Some economists feel the RBI should be more aggressive given the current inflation situation and the outlook.

However, November industrial production was at a disappointing 2.7 per cent as the wholesale price index rose 8.43 per cent in December.

Hence, it is largely felt that RBI governor Duvvuri Subbarao will adopt a calibrated approach with a hike of only 25 basis points.

The tight liquidity prevailing in the banking system could also deter him from going for an aggressive rate hike. Hence, a 50-basis-point increase in the short-term lending rates has been ruled out.

“Personally, I feel the RBI should tighten rates more aggressively, but it will go with a 25-basis-point hike in both the rates as liquidity is tight in the system. I am expecting another 25-basis-point rise in the mid-quarter review,” says Rupa Rege Nitsure, chief economist at Bank of Baroda.

Nitsure adds that the RBI may revise upwards its inflation forecast for March 2011 to 6.5 per cent from 5.5 per cent.

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