Credit ratings agency Moody's today said the Reserve Bank of India's recent move to hike short-term borrowing and lending rates to tame inflation will put pressure on overall deposit and interest rates.
While agricultural production will be the main determinant of consumer price inflation during the next few quarters, the central bank is also expected to keep a tight lid on the monetary policy regardless of how inflation moves, the ratings agency added.
"(Last) Friday's actions by the RBI will put pressure on bank deposits and lending rates, which have been stable and low since November," Moody's said, adding that higher interest rates will lead to increased savings and a decline in growth of loans after a period of rise.In order to tame inflation, the RBI had on July 2 raised the repo and reverse repo rates (the rates at which the RBI lends and borrows short-term funds from commercial banks) by 25 basis points to 5.50 per cent and 4 per cent, respectively.
Although food inflation dipped to 12.92 per cent for the week ended June 19, overall inflation for May stood at 10.16 per cent.
Moody's said there have been signs that inflation has spread away from food and fuel prices towards other goods and services.
"By hiking its policy rates, the RBI is hoping to cool demand and send a signal that it is taking action to ground inflation expectations," it added.
It is widely expected that the central bank may effect another 25 basis point hike in policy rates at its quarterly monetary review meeting scheduled for July 27.
The ratings agency said agricultural production would be a primary factor in determining consumer price inflation in the short-term.
"The main determinant of consumer price inflation over coming quarters will be agricultural production. If the harvest of summer crops late in the year disappoints as it did in 2009, then inflation (is) likely remain uncomfortably high into next year," Moody's said.
Consumer price inflation has been in double-digits since July, 2009.
The ratings agency said that inflationary pressure is expected to ease next year in case a good monsoon leads to a bountiful harvest and prices fall, Moody's added.
"Regardless of how prospects for food and fuel prices evolve over coming months, the RBI will continue to tighten monetary policy, which is currently closer to a slow growth setting rather than one of strong growth and high inflation," it said.