The increase in fuel prices today may not be a strong reason for the Reserve Bank of India (RBI) to increase rates to contain inflation, which rose to 10.16 per cent in May.
The government had also revised to double digits inflation rate for February and March.
“They may want to wait for another 15 days or so and watch the monsoon and crop outlook. That will impact the food inflation, which is a critical factor,” said M M Agrawal, deputy managing director of Axis Bank Ltd.
“RBI will increase rates moderately since growth is important to improve supplies and control fiscal deficit for the long-term control of inflation.”
RBI raised its key repo and reverse repo rates in March and April by 25 basis points each to 5.25 per cent and 3.75 per cent, respectively, to contain inflation.
The central bank is scheduled to announce its monetary policy on July 27.
The rise in fuel prices should lead to a good reduction in the implied deficit and the government’s borrowing programme, said K Harihar, treasurer at FirstRand Bank India in Mumbai.
“This measure, while being positive in the medium term, may also contribute to further inflationary pressures as the direct and pass through impact filters through to WPI,’’ said Harihar. “Given the tight conditions in the market, current pressure to increase rates is not high, especially with monsoon outlook not very clear.”
The inflation for primary articles rose to 17.6 per cent from 16.86 per cent a month earlier and 5.6 per cent a year earlier, the government said yesterday.
Non-food credit is showing robust growth and an introduction of base rate by banks from July 1 would effectively increase the corporate borrowing rate and might temper demand for money and soften inflation, said Harihar.
Companies borrowing at rates lower than the prime lending rate will, henceforth, have to borrow from banks at least at the base rate. Also, by offering to repurchase bonds and reducing the statutory liquidity ratio temporarily, RBI has increased some liquidity in the system.
M Narendra, executive director at Bank of India, said any move on rates by RBI would be well calibrated and might come closer to the July 27 monetary policy.
Credit growth, barring the borrowing by winners of telecom licences, is in accordance with the RBI target of around 20 per cent, he said.
