Faced with double digit inflation, the Reserve Bank of India is likely to raise its policy rate again in its half yearly review of the monetary policy on Tuesday, say bankers.
Although bankers have suggested the RBI to pause on its interest rate hike cycle to check deterioration in asset quality and fire up credit demand, there is little chance that the central bank will accommodate their requests as both food and headline inflation are very high.
“It is clear that inflation is high I believe that there be interest rate hike of 25 basis points by the RBI,” Central Bank of India Chairman and Managing Director, Mr M V Tanksale, told PTI.
Vijaya Bank Chairman and Managing Director, Mr H S Upendra Kamath said, “My view is that to control price situation there would be continuation of monetary policy.”
The central bank has hiked interest rates by 350 basis points since March 2010 to deal with the persistent high inflation, including rising prices of food items. If the RBI raises rates, it would be 13th hike in a span of about 30 months.
IDBI Chairman and Managing Director, Mr R M Malla said, “My own sense is that there could be a pause or hike of maximum 25 basis points by the RBI in its review of the monetary policy.”
The RBI is also confronted with a weakening rupee which puts further pressure on inflation. Besides, slackening industrial growth leaves limited choices for the RBI especially in view of difficult global economic environment.
The central bank has already hinted that inflation must ease before the central bank can reduce interest rates.
“We are deeply sensitive in making India a low interest rate regime but that will take time,” RBI Governor, Mr D Subbarao, had said earlier this month.
“First, we need to bring inflation down in order to bring interest rates down,” he had said.
While the food inflation has touched a six month high of 10.6 per cent, the overall rate of price rise measured on the basis of Wholesale Price Index (WPI) is stubbornly close to double digit since December last year.
The headline inflation at 9.72 per cent in September was a tad lower than 9.78 per cent in August but way above RBI’s comfort zone.