RBI better placed to tackle inflation in Sep review

Economists say RBI likely to raise rates by 25 bps in mid-September.

Even as the Reserve Bank of India sounded caution on inflation in its annual report, dealers and economists say by the next review on September 16, the central bank will have more data and clarity to decide on how to combat inflation, while ensuring it doesn’t hurt growth.

RBI’s annual report yesterday maintained its July policy stance, that inflation remains a concern and monetary policy action would continue. Economists surveyed said RBI is likely to raise rates by about 25 basis points in mid-September to cool excessive demand. It could also narrow the corridor between the rate at which it lends to banks and borrows from them, they said.

“The RBI is not yet done with increasing its rates,’’ said Shubhada Rao, chief economist with YES Bank. “We are expecting tightening to be front-loaded, as the real economy responds with a lag.’’

Rao says RBI may raise the repo rate by up to 50 basis points by March. The central bank on July 27 raised the rate by 25 basis points, the fourth quarter-percent point increase in it since January 1, and the reverse repo rate by 50 basis points. It had then raised the inflation forecast for March to 6 per cent, from its earlier projection of 5.5 per cent made in April.

The central bank has voiced anxiety over rising asset prices and said demand has played a role in influencing these, said Rupa Rege-Nitsure, chief economist at Bank of Baroda in Mumbai. She expects RBI would raise rates by up to 75 basis points by the financial year-end in March.

Before the mid-September policy review, data from first quarter GDP numbers, wholesale price index, index of industrial production and the global trend of prices of commodities, including crude oil, the global economic uncertainty and outlook will all help the central bank decide which instrument will be most suitable, bankers say.

By then, the status of the monsoon over the country will be clearer. A widespread monsoon could help keep food prices under check. In its July policy, RBI had mentioned the monsoon as one of the key factors influencing inflation, apart from a good kharif harvest, global energy and commodity prices.

“The RBI has to do a balancing act,’’ said Krishnamurthy Harihar, treasurer at FirstRand Bank in Mumbai. “While it needs to control inflation, it also has to help keep GDP high, as any sharp increase in rates could have wider implications.”

Yield on the 7.8 per cent bonds maturing in 2020 rose about six basis points today to 8.07 per cent, the highest in about six months.