RBI has enough reason to hike policy rates on Thursday: E&Y

Ernst & Young India today said that despite the steep fall in headline inflation in August, the Reserve Bank is likely to persist with monetary tightening measures by hiking key policy rates by at least 25 basis points at its mid-quarter review on Thursday.

"At 13.8 per cent, the July IIP numbers are indeed very encouraging. And going by this number, it is very clear that there will surely be an upward correction in the demand for funds in the coming months," E&Y India National Leader for Global Financial Services Ashvin Parekh told PTI here.

"This in turn will lead the RBI to further hike the repo and reverse repo or short-term lending and borrowing rates by 25 bps in the September 16 review," Parekh said.

He further pointed out that the drop in headline inflation in August is primarily because of the large basket of items reflected in the new WPI inflation data.

"Therefore, it is unlikely that the central bank will be guided by the August numbers. More importantly, the RBI will look at rising food inflation, besides the comfortable liquidity situation in the system, coupled with industrial expansion, which would be demanding more and more credit from next month onwards," Parekh pointed out.

The government today released a new index for measuring wholesale price inflation, which revealed that prices rose by 8.5 per cent on average in August vis-a-vis the base year of 2004-05. As per the old series with a base year of 1993-94, WPI inflation stood at 9.5 per cent for the month, according to the Commerce Ministry.