RBI may hike interest rates again

The Reserve Bank of India (RBI) will review the monetary and credit policy for the current fiscal Tuesday with chief executives of all commercial banks amid expectations of a hike in short-term interest rates.


"In the light of repeated warning by the central bank on rising prices, we are expecting the reverse repo rate to be revised upward by 25 basis points in the least," said the head of research with a leading securities firm.


The reverse repo rate is the interest charged by the Reserve Bank for the money borrowed by commercial banks and is among the instruments used by the monetary authority to check commercial lending and the supply of money to the system.


The outstanding three-day reverse repo with the central bank stood at Rs.46,070 crore (Rs 460.7 billion or around $10 billion) on July 21.



RBI governor Y V Reddy had surprised the financial markets June 8 by hiking the interest rate on short-term deposits by 25 basis points to 5.75 percent - which was the fourth such increase since October 2004.


Analysts at leading securities research firms such as JP Morgan feel the factors such as high inflation, fast expansion of bank loans, the unprecedented rise in real estate prices and high commercial activity should trigger a rate hike.


"An inflation of 4.68 percent is tolerable. There is no reason for inflationary expectations. If inflation remains moderate, interest rates will be moderate," Finance Minister P Chidambaram said, ahead of the credit policy.


But analysts said Reddy is unlikely to take a soft stand given the fact that successive interest rate hikes have not affected the robust industrial growth in the country nor have they dampened the appetite for credit.


"The headline inflation in our country in a way understates the problem," Redy had told a seminar on monetary policy at the Bureau of International Settlements in Switzerland last month.


"So, in our monetary policy communications we emphasised there is clear evidence of a permanent component in the oil price increase, and hence headline inflation may be understated till that component is fully passed through," he said.


According to analysts, the statements by senior reserve bank officials in recent months indicate that a road map may also be drawn to phase out the cash reserve ratio regime - another instrument of checking money supply.


The cash reserve ratio was hiked to 4.75 percent in September 2004 and to five percent in October 2004 and its phase-out is among the policy changes that are needed before India starts moving towards rupee convertibility, analysts said.


In the past, the central bank was presenting a monetary and credit policy for a given fiscal in April followed by a half-year review in October. But since last year, two quarterly reviews have been added to make it more contemporary.