Analysts see reverse repo rate at 6.25%

The upward pressure on inflation is likely to persist owing to the cascading effect of auto fuel price hikes, which could force the Reserve Bank of India to hike its reverse repo rate by at least 50 basis points in the next 5-6 months, analysts said. Inflation could rise to 6 per cent and reverse repo rate to 6.25% by December, they said.

"I see pressure continuing on inflation due to cascading impact of fuel price increase and continuing high prices of essential commodities. Further, there is a statistical impact of a low base," said D K Joshi, principal economist, Crisil.

Industry ministry data released last Friday showed inflation rose past the psychological 5 per cent mark for the first time in 50 weeks in the week ended June 10, to 5.24 per cent. The last time inflation was over 5 per cent was on May 27, 2005 at 5.25 per cent.

The steady rise in inflation""seventh successive so far till week to June 10""is likely to persist taking it well past the RBI's comfort zone of 5.0-5.5 per cent.

"Inflation could rise to 5.5 per cent in two to three weeks," Rupa Rege Nitsure, chief economist at Bank of Baroda said.

ICICI Securities analyst A Prasanna put it at 6 per cent by 2006-end. Fiscal steps taken by the government may not be sufficient in bringing down the prices as globally too commodity prices are pressured up due to low supply.

Last Thursday, the government allowed import of wheat and sugar at 0 per cent duty to curb soaring prices of these commodities. Inflation has come under pressure as the government hiked the prices of petrol and diesel prices by Rs 4 per litre and Rs 2 a litre, respectively.

The RBI had raised benchmark short-term interest rates by 25 basis points on June 8 but the rate hike is not seen sufficient.

"The RBI has no option but to raise interest rates as its primary objective is price stability and targeting inflation," Nitsure said. Rate hikes are also seen as a possible step to align with the rising interest rates globally.

US Federal Reserve is expected to hike its target Fed funds rate by 25 basis points to 5.25 per cent next week. Several Fed members, including Chairman Ben Bernanke, have indicated their discomfort with higher inflation readings. If raised, this would be the 17th successive hike in U.S. rates over a span of two years.

European Central Bank raised its interest rates to 2.75 per cent from 2.50 per cent and there have been indications from ECB president of more such rate hikes.

Bank of Japan has also hinted at a gradual tightening in rates. Japanese interest rates have been at zero percent for last five years.

"Several central bankers have been raising rates. Our monetary policy stance cannot be out of sync of other countries," RBI governor Y V Reddy had said after earlier this month.