Review time

Mumbai, March 16: The Reserve Bank of India is set to raise key policy rates by at least 25 basis points at its mid-quarter policy review tomorrow as it persists with a calibrated approach of taming inflation without endangering the economic growth.

If the central bank raises both the repo and the reverse repo by quarter of a percentage point each, it will be the eighth time since March last year that it will be using a rate hike as a monetary tool to hammer down inflation.

As a result, the repo rate could move up to 6.75 per cent and the reverse repo to 5.75 per cent. More importantly, both deposit and lending rates could rise further, though bankers aver that this will not happen immediately.

Repo is the rate at which the RBI injects liquidity into the banking system and reverse repo rate is the rate at which it sucks out excess liquidity. As the banking system is now passing through a phase of tight liquidity, the repo rate is the policy rate.

A small section of bankers had earlier concluded that the RBI might not tinker with key policy rates tomorrow as food inflation had showed declining trends and growth could slow down in the event of another hike. However, higher-than-expected inflation for February has led to a near unequivocal opinion that RBI governor Duvvuri Subbarao will raise key rates by 25 basis points.

Data for February showed headline WPI rising to 8.3 per cent, much higher than the estimates of around 7.8 per cent and also above the RBI’s projection of 7 per cent by the end of March. More importantly, inflation internals showed that it was because of the rise in manufactured products, which grew 4.94 per cent, up from 3.75 per cent in January.

“Given the higher-than-expected inflation number for February, the RBI will certainly raise the rates by 25 basis points tomorrow,” says a treasury head from a foreign bank.

Madan Sabnavis, chief economist at CARE Ratings, said the rise in manufactured products was of direct relevance to the RBI as monetary policy could address such inflation, which was not driven only by supply side factors.

Even though the RBI is no longer having to wrestle with food-inspired inflation, it has also to contend with other factors that could push up prices. In a note, Abheek Barua, chief economist at HDFC Bank, said with lingering political concerns in West Asia and North Africa and the earthquake in Japan, upside pressures to global crude prices were unlikely to abate in a hurry. “The impact of the recent surge in oil prices is yet to be felt on domestic inflation and our sense is that if current prices sustain there is an upside risk of WPI inflation hitting double-digit levels again by July-August,” he said.

Given such a scenario, there are a few who think that the RBI can raise rates by even 50 basis points tomorrow.

Rupa Rege Nitsure, chief economist at Bank of Baroda, said while there were pressures building up on the non-food side, the RBI would be more aggressive in raising key rates as it had also to contend with the government borrowing programme next fiscal.

The broking community has already discounted a 25-basis-point hike. Anything higher will impact shares negatively, sources said.