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Finance Minister hopes mid quarter review will check price rise

A little ahead of the RBI's first ever mid-quarter review on September 16, Finance Minister Pranab Mukherjee today expressed hope that the central bank will take appropriate action to check rising prices.

business Updated: Sep 14, 2010 21:44 IST

A little ahead of the RBI's first ever mid-quarter review on September 16, Finance Minister Pranab Mukherjee today expressed hope that the central bank will take appropriate action to check rising prices. Although inflation slipped to 8.5 per cent in August according to the new WPI series, experts feel the RBI will continue to tighten monetary policy as the rate of price rise is still high.

"The RBI is constantly watching the situation. We are in touch with the RBI. The RBI and the Ministry of Finance will take appropriate measures at the appropriate time," Mukherjee said.

The RBI, for the first time, will come out with a mid- quarter economic policy review on September 16. "The RBI will go in for a rate hike as robust growth in industrial output and healthy economic growth would give the RBI enough cushion to make money expensive," Deloitte Principal Economist Shanto Ghosh said.

With overall inflation coming in at 8.5 per cent even when calculated with 2004-05 prices as the base, economists said the figure is still high and will prompt the RBI to raise its short-term lending (repo) and borrowing (reverse repo) rates.

"I expect RBI to raise repo and reverse repo by 25 basis points on September 16. Inflation still remains at elevated level," Axis Bank Chief Economist Saugata Bhattacharya said.

The RBI has raised interest rates four times this year, upping key policy rates by 100 basis points as it tries to combat high inflation in Asia's third-largest economy. Experts believe the RBI will further narrow the difference between the repo and reverse repo rate, known as the rate corridor, to check liquidity.

"RBI may adapt a relatively benign approach towards the monetary policy. It is expected that the reverse repo-repo corridor could be further narrowed by the sole hiking of the reverse-repo rate," Kotak AMC CEO Sandesh Kirkire said.

In its first quarter monetary review in July, the central bank had raised short-term lending and borrowing rates by 0.25per cent and 0.50 per cent, respectively. Following the increase, the repo rate stands at 5.75 per cent and the reverse repo rate at 4.50 per cent. The country's GDP grew by 8.8 per cent in the first quarter, against 6 per cent in the April-June period last fiscal.

Furthermore, industrial output expanded by 13.8 per cent in July from 7.2 per cent in the corresponding month last
year.