Economists see more tightening on July 27

Economists expect the apex bank to further hike key short-term rates in its July 27 monetary policy review to tame rising inflation which may trigger bankers to raise interest rates.

"They (banks) could wait to see what the RBI does on July 27 before changing interest rates. However, banks will have to react sometime. On July 27, RBI might take some more tightening measures on rates if the inflationary pressure persists," Prime Minister's Economic Advisory Council Chairman C Rangarajan told PTI here.

He said the RBI move today to hike short-term lending and borrowing rates by 25 basis points is aimed at easing inflation, which has already entered double-digits, and it will not worsen the tight liquidity conditions.

"It is a right decision given the inflationary situation, some action was called for from the central bank. This is a signal from the RBI. It won't impinge on the liquidity situation, as any hike in CRR would have done. It is a move to target the inflation," Rangarajan, who also served as RBI governor, said.

He said RBI will assess liquidity conditions before hiking cash reserve ratio, which is the requirement for banks to park part of deposits in cash with the central bank, in its July 27 review. "On CRR, the central bank will see the liquidity situation, which is tight at present and is a temporary phenomenon. Any changes in CRR will depend on liquidity situation on the eve of the monetary policy review," Rangarajan said.

Crisil Chief Economist D K Joshi also said liquidity will not be affected due to the RBI action, but interest rates will soon be hiked. "I do not foresee any short-term change in the liquidity situation. Liquidity is already tight. CRR has a bigger role to play in liquidity than the short-term lending and borrowing rates. Interest rates will no doubt soon be hiked," he said.

Expecting RBI action to control inflation, Joshi expected the short-term lending and borrowing rates to be further hiked by another 25 basis points in late July.

Yes Bank Chief Economist Shubhada Rao also expected RBI to further hike policy rates by 25 basis points in its monetary review. "Going forward, we expect another 25 basis point rise on July 27," she said.

Inflation in May crossed 10 per cent, even as food inflation is showing signs of moderation.