RBI may raise key policy rates by 25 bps: Bankers

With inflation hovering above the comfort zone, the Reserve Bank of India (RBI) may raise key policy rates by 25 basis points in its first mid-quarterly review of the credit policy for 2011-12 tomorrow.

“I think RBI would take one more small step to curb inflationary expectations. The market is expecting a 25-basis points increase,” said Indian Overseas Bank chairman and managing director M Narendra. RBI had already expressed its concern on many occasions, he said.

In its annual policy document for 2011-12 released last month, RBI had said inflation control would be its primary focus in the near future, even as it agreed the high rate of price rise would impact the country's growth story.

“Given the inflation condition, the general consensus is RBI would raise rates by 25 basis points,” said Punjab & Sind Bank executive director P K Anand. Inflation moved up to 9.06 per cent in May from 8.66 per cent in the previous month, mainly on account of a rise in the price of manufactured products.

According to IDBI Bank executive director R K Bansal, rising inflation numbers have raised the expectations of a rate rise by RBI. “My feeling is the central bank could further raise rates by 25 basis points,” Bansal said. RBI has raised key policy rates nine times since March 2010, and is likely to continue with its tight monetary policy stance to tame inflation, which is edging toward double digits.

The central bank, in its annual policy, had admitted inflation would remain a matter of concern in the next few months, on account of high global commodity prices, particularly of crude. Analysts feel repeated rate increases have led to dwindling investment, which in turn led to a slowdown in economic expansion.

During the January-March quarter, gross domestic product grew only 7.8 per cent, the slowest pace of growth in five quarters. At the same time, factory output — as measured by the Index of Industrial Production— grew by only 6.3 per cent in April, against 13.1 per cent in the corresponding period of the last financial year. However, the central bank's priority would be to check price rise, analysts said.