Inflation will weigh again on monetary moves next month

Amid expectations of another hike in its key lending and borrowing rates, RBI today said inflation will weigh yet again in determining the monetary direction when the policy comes up for review on November two.

"We will study the de-segregate inflation data in the monetary policy review next month. Inflation figure would be one of the variables to be looked at during the review," RBI Governor D Subbarao said after the board meeting of the central bank here.

Inflation rose to 8.62 per cent in September on higher prices of essential items from 8.51 per cent in the previous month. Food inflation too rose further to 16.37 per cent during the week ended October 2 from 16.24 per cent in the previous week.

Prime Minister's Economic Advisory Council Chairman C Rangarajan said the Reserve Bank may need to raise policy rates yet again to tame the "uncomfortably" high inflation.

"The inflation is at uncomfortably high level. So continued actions on the part of RBI may be needed," Rangarajan told PTI.

In a bid to rein in demand by checking consumer spending, the RBI has raised short term rates five times this year.

The RBI in its mid-quarterly review in September had hiked the short term lending (repo) rate by 25 basis points and borrowing (reverse repo) rate by 50 basis points.

"Inflation remains the dominant concern in macroeconomic management," RBI had said while raising the repo and reverse repo rates to 6 per cent and 5 per cent, respectively.

Economists said that RBI would raise the key rates by 25 basis points each on November 2 and then put a pause to the rate hike cycle.

"We expect another 25 bps hike in repo and reverse repo and after that RBI will pause its rate hike cycle. The rate of rise in prices is coming down gradually. Inflation in prices of manufactured items is easing, even as pressure on food items remain," HDFC Bank Chief Economist Abheek Barua said.

"I expect RBI to step in with a 25 basis points hike in both repo and reverse rates next month. Food inflation is still stubborn, even as pressure on prices of cereal and pulses are easing," Crisil Chief Economist D K Joshi said.

Experts feel the rate hike decision would be guided by the need to contain inflation as a hike in rates will lead to a rise in the cost of funds for banks and will make loans more expensive. This, in turn, will reduce consumption.