RBI likely to raise key rates on Nov 2

The Reserve Bank of India (RBI) is likely to make the sixth increase in key policy rates this year, as it seeks to get a firmer grip on inflation. RBI Governor D Subbarao will announce the second-quarter monetary policy review on Tuesday in Mumbai after meeting bankers.

The central bank might increase both the repo and reverse repo rates by 25 basis points each to 6.25 per cent and 5.25 per cent, respectively, said economists.

Inflation, as measured by the Wholesale Price Index (8.6 per cent in September), remains much higher than RBI’s comfort zone. The central bank, in its July policy, raised the March-end target for inflation to six per cent from 5.5 per cent.

“It’s going to be a tough call, but RBI will more likely raise rates since inflation remains a major policy challenge,” said D K Joshi, the chief economist at Crisil. “Also, monetary management becomes a more complicated task with global factors. Better act safe than being sorry. It’s all about balancing.”

The RBI policy will be announced just before the critical US Federal Reserve announcement regarding the much touted QE-II, or the second round of quantitative easing. The probability of the Federal Reserve going ahead with easing rose as the US jobless rate hovered around 10 per cent for a third month in October.

Any quantitative easing is likely to increase liquidity in the US, but could push up commodity prices and inflation globally, says Joshi.

However, some bankers express concerns of slower credit offtake and the need to put off any increase in rates. Some others caution on a possible negative impact on economic growth.

“While RBI may raise the price of credit, it may also initiate steps to increase the availability of credit,” said Samiran Chakraborty, regional head of research at Standard Chartered in India.

Still, others say any rise in interest rates will increase the rate differential between India and the Western economies and make India an even more attractive destination for flows to come in, making RBI’s job tougher in more ways than one.