It had earlier raised rates by 25 basis points on July 2
The Reserve Bank of India (RBI) may increase its key rates for a fourth time this year to contain inflation and ensure the economic growth, which is getting back on track, doesn’t get derailed.
The central bank’s brass will meet commercial bank chiefs on Tuesday and also seek to address other issues of ensuring sufficient liquidity in the banking system, besides giving its outlook on prices and growth. RBI may also announce draft guidelines on licences for new banks.
RBI earlier raised the repo and reverse repo rates by 25 basis points on July 2 as part of its unwinding of the economic stimulus and also to contain inflation. It had slashed the repo rate by 425 basis points from 9 per cent in October 2008 to April 2009, as the contagion of global economic crisis began to hurt India.
Inflation as defined by the wholesale price index accelerated to 10.55 per cent in June. The measure was revised to 11.2 per cent in April, a 19-month high. The rise in prices, initially on account of rising food prices, has now become more generalised and broad-based. Economists and bankers surveyed expect RBI to continue raising rates in a calibrated manner to avoid hurting growth by slamming breaks.
RBI may raise the repo and reverse repo rates by 25 basis points, most of the dozen-odd economists, bankers and dealers surveyed said. One basis point is one-hundredth of a percentage point. It last raised the repo rate to 5.5 per cent on July 2.
“We maintain our view of a further minimum 50-basis-points rate hike in 2010, but, given the growth outlook and likely stickiness in inflation, the risk to rates is on the upside,” Rohini Malkani, chief economist, South Asia for Citigroup said in a report.
“Given the growth and inflation outlook, the risk to rates is on the upside and would depend on the monsoon, global developments and further rise in non-food manufactured product inflation from 7.3 per cent-levels currently.”
The last time non-food manufactured production crossed 8 per cent was in mid-2008 and at that time, interest rates were 350-basis-points higher than current levels, according to Malkani.
Chakravarty Rangarajan, the chairman of the Prime Minister’s Economic Advisory Council, on Friday said containing inflation should be the immediate focus of the government. Inflation is a major cause of concern in an otherwise healthy economic environment, he said.
It was essential for RBI to maintain a bias towards further tightening, as “inflation rates are more than twice the comfort zone. Strong monetary policy is required. There could be a series of small steps rather than one strong one,” Rangarajan said on Friday. On the same day RBI governor D Subbarao met Finance Minister Pranab Mukherjee to review the macroeconomic situation.
Liquidity
The RBI may seek views of bankers on measures to improve funds with banks. It is likely to continue with its two sessions of daily liquidity facility to ensure banks have recourse to funds.
Cash in the banking system began dwindling in late May as companies began to withdraw money to pay advance income tax and winners of the two telecom auctions withdrew more than Rs 105,000 crore to pay the license fees. Banks, which were parking daily Rs 40,000 crore with RBI at the Liquidity Adjustment Facility until the third week of May, turned net borrowers by the close of May.
They remain so till date and borrow over Rs 60,000 crore from the RBI every day. Bankers are concerned that a slow growth in deposits coupled with rising demand for funds may affect liquidity.
Year-on-year advances grew 21.3 per cent to July 2. Deposits grew 14.9 per cent in the same period. Banks lent Rs 1,57,600 crore between April 1 and July 2 this year, compared with Rs 20,000 crore in the year-ago period. Deposits grew by Rs 1,46,600 crore as against Rs 1,96,900 crore last year.
RBI, which permitted banks from May 26 to borrow on 0.5 per cent of their SLR holdings without having to pay a penalty, withdrew the facility on July 16, signaling its comfort with liquidity. Maturity of bonds on July 28 should infuse Rs 30,000 crore into the system.
