RBI will hike policy rates by 25 basis points: Goldman Sachs | india | Hindustan Times
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RBI will hike policy rates by 25 basis points: Goldman Sachs

india Updated: Apr 01, 2010 20:32 IST

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The Reserve Bank will hike short-term lending and borrowing rates by 25 basis points each in its April policy review, Goldman Sachs ECS Asia Research said today.

It further said the odds for a 50 basis point hike have also increased with inflation hovering around double digits.

Policy rates need to rise by 300 bp (3 per cent) this year through a combination of rate hikes and tightening liquidity, it said.

"We continue to hold our view that effective policy rates need to rise by 300 bp to normalise policy, with 150 bp of rate hikes and 150 bp of tightening through liquidity withdrawal in 2010," Goldman said in a statement.

It said, "After an inter-meeting rate hike on March 19, we think the Reserve Bank of India will hike policy rates by 25 bp in the April 20 (annual monetary policy) meeting, and the probability of a 50-bp hike has increased."

The Reserve Bank recently raised the repo and the reverse-repo (short-term lending and borrowing) rates by 25 basis points each to 5 per cent and 3.5 per cent respectively, to contain inflation.

The central bank had also raised Cash Reserve Ratio (CRR), the amount that banks keep with RBI, by 75 basis points to 5.75 per cent in its last quarterly review.

Higher prices of milk and pulses have driven food inflation to 16.35 per cent for the week ended March 20, pushing overall inflation to near double digits.

The overall inflation, which includes variation in prices of food and non-food items, was 9.89 per cent in February and is estimated to cross double-digit mark soon.

In view of the rising prices of essential goods and the likelihood of the of food inflation spreading to manufactured goods, experts feel the RBI could take more measures in its forthcoming monetary policy on April 20 to contain price rise.

Meanwhile, the government today said that inflation could cross the 10 per cent mark in the next two weeks but exuded confidence that it would start declining from July.

"Wholesale Price Index (WPI)-based inflation will be around 10 per cent for March...it has psychological implications," Chief Economic Advisor Kaushik Basu told reporters here.

The downward trend would start from July, he said, adding it could move up and down in the intervening months of April to June.