The Reserve Bank may raise key policy rates by up to 50 basis points in its July 27 monetary policy review to check double-digit inflation, said a member of the Prime Minister's Economic Advisory Council.
"I think there will have to be some tightening... may be 25-50 bps on July 27," M Govinda Rao said.
Although food inflation fell sharply to 12.92 per cent for the week ended June 19, from 16.90 per cent in the previous week, the overall inflation for the month of May was
in double digits at 10.16 per cent.
Rao said the recent hike in fuel prices may add 0.8-0.9 percentage points to inflation.
Last week RBI said it would come out with its monetary review on July 27, 2010. The apex bank is widely expected to raise policy rates to rein in high prices.
However, since the banking system is facing tight cash conditions due to payment for spectrum for high speed telecom and broadband services and advance tax outgo, some experts are also of the view that RBI would wait for liquidity to ease before going for rate hikes.
RBI deputy governor KC Chakrabarty said earlier this week that the possibility of interest rate hikes by the central bank is always there as policy measures depend on the changing economic scenario.
"The policy measures from the central bank will depend upon the changing economic environnment...the possibility of rate hike is always there," Chakrabarty said.
RBI had hiked borrowing and lending rates by 25 basis points in its annual monetary policy in April to 3.75 per cent (reverse repo rates) and 5.25 per cent (repo rate) respectively.
It also raised the cash reserve ratio (CRR), the portion of money banks park with it by 25 basis points, sucking out Rs 12,500 crore of excess cash from the banking system.
On fiscal deficit, Rao said that the government can reduce it to 5 per cent from the targeted 5.5 per cent of GDP for this fiscal on increased revenue from 3G spectrum auction.
"They can reduce (it) to 5 per cent," Rao said.
He added, however, "I think RBI basically will have to see what the liquidity situation is and then work with government to reduce borrowing. The less you borrow, the more liquidity there will be in the market and therefore less pressure on interest rates."
The government has planned to borrow over Rs 4.5 lakh crore from the market. However, increased realisation from spectrum sale may reduce borrowings, though there is no official word to that effect so far.