Leading economists expect the Reserve Bank of India (RBI) to further raise its short-term rates in its mid-quarter review in September to rein in inflation, but do not think that it will suck out liquidity from the system.
"We could see a hike of 25 basis points in the repo (lending) and reverse repo (borrowing) rates at the mid-quarterly review on September 16, depending on the inflationary situation," Yes Bank Chief Economist Shubhada Rao told PTI here.
The apex bank in its monetary review on Tuesday, had decided to come out with a mid-quarterly review, first of which is scheduled for September 16.
Rao also said there is a likelihood of an overall 50-75 basis points hike, more probably 75 bps, in the overnight rates during the rest of the fiscal and the expected hike in September will be part of that.
"A lot depends on inflation. By September 15, RBI would have a complete assessment of the monsoon. In the coming month or two, if there is a escalation in the core inflation, then there will be hikes," she added.
As for the cash reserve ration (CRR), which is the money that banks have to park with RBI, she does not see a strong possibility of a hike. "Liquidity would be on an even keel in the next few months," Rao said.
In its monetary review on Tuesday (July 27), RBI had hiked short-term borrowing (reverse repo) rate by 50 bps and lending (repo) rate by 25 bps to bring down inflation, but refrained from sucking out liquidity through a CRR hike. Liquidity in the system dried up after telcos paid over Rs 1 lakh crore towards spectrum fees in May and June.
However, a key RBI official had recently said the central bank needs to adopt a more hawkish monetary policy to tame inflation. "There is a need for aggressive monetary policy to anchor inflation," the official had said.
Crisil Chief Economist D K Joshi, too, said he expects hikes in the short-term lending and borrowing rates, probably in the next review meeting of RBI. "We can expect hikes in the repo and reverse repo rates... Maybe in the next review meeting. We believe there is a strong possibility of 50-75 bps rise in the short-term lending and borrowing rates by end of the fiscal. It will happen in a gradual manner," he said.
He, however, said inflation seems to be on a downward swing. Inflation has been in double-digits for the fifth consecutive weeks till June. However, food inflation moved down to a single digit, first time this year, to 9.67 per cent during the week ended July 17, as vegetables, especially potatoes and onions turned cheaper.
Axis Bank Chief Economist Saugata Bhattacharya said there will be further hike in the repo and the reverse repo rates but the exact timing will depend on the inflationary pressure.
"If inflation persists, we can expect a hike of 25bps at its mid-quarterly review on September 16," he said, adding RBI will go for a hike of 50-75 bps in the short-term lending and borrowing rates during rest of this fiscal.
"As for the CRR, we don't think the central bank will hike it for now. CRR will be increased only if there is a huge inflow of foreign capital leading to excess liquidity in the economy," Bhattacharya said.
As the government came under increasing attack from the Opposition on the surging prices, RBI Governro D Subbarao met Finance Minister Pranab Mukherjee and is understood to have discussed issue of inflation.
