RBI likely to hike rates as inflation control remains priority

Reserve Bank of India (RBI) Governor Raghuram Rajan is likely to hike the key policy interest rate by at least 0.25 percent in the mid-quarter review of the monetary policy to tame high inflation levels, economic analysts said Tuesday.

"We are expecting 25 basis points hike in repo rate by the RBI and the subsequent adjustments in MSF (marginal standing facility) rate," senior economist at Dun & Bradstreet India Arun Singh told IANS.

The RBI is scheduled to announce its mid-quarter review of the monetary policy for 2013-14 Wednesday in which it will decide on the repo and reverse repo rates which are key policy instruments which determine lending and borrowing rates by the commercial banks.

The repo rate is the rate banks pay when they borrow money from the central bank to meet their short term fund requirements. Reverse repo rate is the interest rate that the RBI pays to commercial banks when they keep their surplus short term funds with the central bank.

The central bank is also expected to hike the reverse repo rate by an equal measure to maintain a 100 basis points, or one percent gap between the two rates, which has long been the default setting.

Singh's views were corroborated by Dipen Shah, head, private client group research, Kotak Securities, who told IANS that a 25 basis points hike was on the cards to contain the inflationary pressure.

"We expect the RBI to raise 25 basis points in the key lending rates. This will be done largely because of inflation levels."

This will be the third straight increase in the repurchase or repo rate after Rajan took over charge of the apex bank on Sep 4. In September, he had increased the repo rate by 0.25 percent to 7.5 percent.

In the second quarter review of the monetary policy for 2013-14, held in October, Rajan had again hiked the repo rate by 25 basis points or 0.25 percent to 7.75 percent.

Governor Rajan had recently said that though the economy is weak, inflation is also higher than what the RBI is comfortable with.

The central bank had earlier said the priority of the monetary policy would be to tame the high wholesale and retail inflation levels that have soared due to high food prices.

The meeting slated for Wednesday will be amidst high retail and headline inflation, even as the country's industrial output contracted by 1.8 percent during October.

India's headline inflation based on wholesale prices rose to 7.52 percent in November due to high fuel and food prices.

The country's main inflation measure based on the wholesale price index (WPI) was at seven percent in the previous month against 7.24 percent in the corresponding month of last year.

Food prices jumped by 19.93 percent year-on-year during the month under review. They increased by 18.19 percent in October.

The country's retail inflation measured in the consumer price index (CPI) for November rose to 11.24 percent as compared to 10.17 percent in the previous month, data released Thursday showed.

The country's industrial output contracted by 1.8 percent during October -- from a year-on-year growth of 8.4 percent in the corresponding month of last year -- due to poor performance of the mining and manufacturing sectors.