RBI may raise rates by 25 bps: Bankers

New Delhi: Faced with inflation much above the comfort level, the Reserve Bank is likely to raise key interest rates by another 25 basis points in its first quarterly review of monetary policy 2011-12 on July 26.

"There is a general perception that (policy) rates are going to go up by 25 basis points," Canara Bank Executive Director Archana S Bhargava said.

Banks would respond to policy action as they have been doing it in the past, she added.

The headline inflation for June at 9.44 per cent is much above the comfort zone of 5-6 per cent.

In its fight against price rise, the RBI has hiked key policy rates 10 times, or 275 basis points, since March, 2010. It has clearly articulated that it is ready to sacrifice growth in the short-term.

Inflation has reached such a level that RBI cannot but hike the rate by 25 basis points, said Kotak Mahindra Bank Group CFO Jaimin Bhatt.

Echoing similar views, HSBC India CEO Stuart Davis said the RBI is expected to raise rate by 25 basis points.

YES Bank Managing Director and Chief Executive Rana Kapoor said the market has factored in a 25 basis points increase in repo rate by the RBI.

"The RBI rate action will continue to be driven somewhat mechanically by the inflation data that remain way above its comfort zone. Thus, a 25 basis points hike in the policy rate seems almost certain," HDFC Bank chief economist Abheek Barua said in his report.

The central bank faces a challenging task of managing the inflationary pressure at a time when the industrial growth has started showing signs of moderation.

The factory output growth rate, as measured by the Index of Industrial Production (IIP), dipped to 9-month low of 5.6 per cent in May.

It is to be noted that the government has already lowered India's GDP projection for 2011-12 to 8.6 per cent from the earlier estimate of about 9 per cent on account of slowdown in industry output.

Taking into consideration all these issues and slackening of credit growth, bankers have suggested the RBI to hold the rates at the current levels and sought a clearer picture on the future interest rates and inflation scenario.

Endorsing the view, SBI Chairman Pratip Chaudhuri earlier this month had said that the RBI is unlikely to hike the rate further in its upcoming review.

"As of now, in our view is it (the rate hike by RBI) will come with a lag... with a gap," Chaudhuri said, adding that he would be surprised if the RBI indeed raised the rates on July 26.

Source: Financial Express