Faced with high food inflation, the Reserve Bank is likely to raise key interest rates by 25-50 basis points at its quarterly monetary policy review on Tuesday.
Although the RBI will have to draw a balance between the competing requirements of containing inflation and promoting growth, bankers expect that the central bank will tighten monetary supply a bit.
"Conventional wisdom says that there should be at least a 25 basis points hike in interest rates," according to State Bank of India Chairman O P Bhatt.
Despite moderating for two weeks, food inflation was still high at 15.52% for the week ended January 8 on account of rising prices of essential food items like vegetables, particularly onions and tomatoes, besides fruits, milk and eggs.
Last week, RBI Governor D Subbarao had expressed concern over food inflation, saying, "Some of the vegetable prices are still high."
Though analysts are not sure whether any further tightening of interest rates can check the price rise, the central bank seems to have no other option.
The RBI could also take steps to ease the liquidity crunch in the system, according to analysts.
It is to be noted that the RBI chose not to tinker with policy rates at its mid-quarter review on December 14, as food inflation had fallen from double-digit levels to a single digit. However, food inflation subsequently shot up.
The stubbornly high food inflation rate may prompt the RBI to now tighten money supply by raising both short-term lending (repo) and borrowing (reverse repo) rates.
Endorsing the widespread view, HDFC Ltd Chairman Deepak Parekh said the RBI is expected to raise key short-term rates by 25-50 basis points.
"The RBI may be looking at an increase (of short-term rates) of 25-50 basis points... But I personally feel that interest rates are already high and it will impact the growth of retail loans and housing," Parekh said.
Subbarao had said the country was facing surging inflation and the monetary policy needs to be calibrated to manage it, as well as support growth.
In 2010, the RBI raised the repo and reverse repo rates six times to 6.25 per cent and 5.25%, respectively, to normalise the monetary policy, which was loosened to combat a slowdown in economic growth in the wake of the global financial meltdown in late 2008.