The Reserve Bank on Monday hinted at a hike in key rates in its mid-year year policy review on Tuesday, saying that inflation is above the comfort level -- an issue which the government has taken up with the central bank.
"The Reserve Bank's policy stance is likely to be shaped by the dual goals of maintaining the growth momentum in an atmosphere of global uncertainty, while striving to moderate inflation further," the central bank said in its macroeconomic and monetary developments report released today.
The RBI said overall inflation, which stood at 8.62 per cent in September, is "above the comfort level," even as it retained economic growth outlook for the current fiscal at 8.5 per cent.
It noted that uncertain global outlook, and the dominance of supply rigidities in certain sectors that impart rigidity to the inflation path, pose greater challenges for monetary policy.
This year, the central bank has raised key rates five times, eventually aimed at taming public consumption, but Finance Minister Pranab Mukherjee feels that inflation is still a "matter of concern."
"Let us wait. RBI policy statement will be made shortly... I am in discussion with RBI Governor (D Subbarao)," the Minister told reporters in New Delhi today.
Subbarao, who had met Mukherjee on Friday and is believed to have discussed macro-economic situation with him, is widely expected to go for another 25 basis points hike in repo (short-term lending) and reverse repo (borrowing) rates.
Repo rate currently stands at 6 per cent and reverse repo at 5 per cent.
Since January, RBI started reversing its soft monetary policy it began in September 2008, when global financial crisis deepened after the collapse of US financial major Lehman Brothers.
While a few economists forecast another rate hike on Tuesday, others said that a slowdown in factory output numbers of August and core-sector figures of July might force RBI to give a rethink to its rate hike decision.
RBI, however, noted that credit to non-food sectors was healthy and that loan disbursals to agriculture sector were declining.
"Going forward, the growth-inflation outlook will dominate the policy response," the apex bank said, and added that "headline inflation... continues to be a cause of policy concern and priority."