RBI likely to raise repo rates: EIU

The Reserve Bank of India (RBI) is likely to hike its repo rate in two tranches by 0.25% each in a bid to rein-in high inflationary pressures, an economic think-tank said.

The forecast comes a week ahead of the central bank's scheduled mid-quarter review of the domestic economy.

"EIU expects the Reserve Bank to remain under pressure to raise interest rates further. We see at least two more 25-basis-point increases in the repo rate this year. This should be sufficient to turn real interest rates positive," Economist Intelligence Unit's (EIU) Head of Research (South Asia and Australasia), Manoj Vohra, said in a statement here today.

EIU is the research and intelligence arm of the London-based business publication, The Economist.

The hike in the repo rate is expected despite the sharp monetary tightening since early 2010, it said.

The repo rate, which currently stands at 6.5%, has now been raised by a total of 1.75% since February last year, it said, adding the central bank's anticipated aggressive stance is largely a reflection of its growing concern of the domestic inflationary pressures and rising commodity prices globally.

"Inflation remains uncomfortably high, raising questions about Indian economy's ability to grow by 8% or more a year without triggering an inflationary spiral. There are structural reforms needed to address this challenge," Vohra said.

According to EIU, private investment and the government spending would fuel domestic growth in the next five-years.

"However, despite India's current impressive growth performance there are a number of clouds hanging over the economy, including the stubbornly high inflation rate and the wide (albeit narrowing) budget deficit," it said.

Higher interest rates could exert an upward pressure on the value of the rupee and undermine the government's fiscal consolidation plan, the EIU said.