RBI likely to raise policy rates, but only moderately: Bankers | business | Hindustan Times
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RBI likely to raise policy rates, but only moderately: Bankers

The Reserve Bank is likely to squeeze money supply and make borrowings costlier further in its monetary policy on Tuesday to tame inflation which has come close to ten per cent, say bankers.

business Updated: Apr 18, 2010 12:35 IST

The Reserve Bank is likely to squeeze money supply and make borrowings costlier further in its monetary policy on Tuesday to tame inflation which has come close to ten per cent, say bankers.

The apex bank, however, may not aggressively tighten the monetary policy and is likely to resort to only a moderate 0.25 per cent hike in short-term borrowing rates and mandatory bank deposits with RBI, bankers said.

According to them, moderate tightening should suffice because inflation is expected to ease after the rabi (winter) crop, including wheat, sugar, potatoes and pulses, reaches the market, around mid-May.

Much hawkish stance on monetary tightening may hamper the economic recovery, they said.

"My sense is that a quarter per cent of increase in both CRR, repo and reverse repo rates is the right thing for RBI to give confidence and comfort to the market and to avoid any knee-jerk reactions," Yes Bank Managing Director and CEO Rana Kapoor said.

Repo and reverse repo are the key short-term rates, while CRR is the money that every bank has to mandatorily keep with the central bank.

Also, industry sources said that banks are not likely to raise lending rates, at least immediately, even if RBI hikes rates by a quarter per cent as liquidity is sufficient in the near term.

"The RBI is likely to hike the rates by anywhere between 0.25-0.50 per cent as the inflation situation warrants monetary action," Oriental Bank of Commerce's Chairman and Managing Director T Y Prabhu said.

The apex bank began unwinding its monetary stimulus by upping the CRR (banks' portion of deposits with the RBI for zero interest) by 0.75 per cent in January and policy rates by 0.25 per cent in March to cool down inflation.

State Bank's Chief Financial Officer S S Ranjan was of the view that hike in RBI action is certain given the current inflation conditions and signs of the economic recovery. "I expect that CRR will be hiked by 0.25 per cent as the focus of the central bank now is to bring down inflation."

He, however, was of the view that the Reserve Bank is unlikely to hike the policy rates (repo and reverse repo) immediately as it has done that already just last month.

Another hike in key policy rates in a short span of time is unlikely to happen, Rajan said.

A similar view was expressed by Kolakata-based Uco Bank's Chairman, S K Goel who said that in all likelihood the RBI may hike its repo, reverse repo rates by 0.25-0.5 per cent in the policy.