RBI hints at rates' hike to contain inflation

The Reserve Bank of India is likely to hike its key rates on Tuesday. The central bank said on Monday it would continue exiting from its easy money regime to check double-digit inflation, while ensuring stable economic growth.

"Given the risk to inclusive growth from high inflation, the monetary unwinding that started in October, 2009 should continue till inflation expectations are firmly anchored and inflation is brought down," RBI said in its macroeconomic report.

The RBI is set to unveil its quarterly review of the annual monetary policy on Tuesday.

It is widely expected to hike its short-term lending and borrowing rates (repo and reverse repo) by at least 0.25 per cent each to tame inflation, which was 10.55 per cent in June.

"The major policy concern. . . would be to contain inflationary pressures and anchor inflationary expectations," the central bank said.

The wholesale inflation is in double digits for the past five months due to high food and fuel prices against RBI forecast of 5.5 per cent by end-March.

According to economists, the headline inflation is no longer confined to food items but has spread to manufactured products.

Citing a continuing growth momentum, the Reserve Bank professional forecasters upped their 2010-11 gross domestic product growth projection to 8.4 per cent against 8.2 per cent reported in the previous survey.

However, the apex bank cautioned that uncertain external environment is a major risk to growth in the near-term.

Referring to the prevailing tight cash conditions in the system, RBI said the liquidity situation will ease but 'the calibrated normalisation of monetary policy may not lead to return of the persistent easy liquidity conditions that prevailed last year'.

The banking system faced an unprecedented tight cash conditions since early June on account of nearly Rs 1.36 lakh crore (Rs 1.36 trillion) flowing out of the system due to payments for 3G and broadband wireless auctions and advance tax outgo.

Noting that credit growth in banking system has been picking up, led by state-owned banks, RBI said that there is a need for banks to step up deposit mobilization to meet credit demand.

Further, the apex bank said that a sustained and a rapid rise in housing prices over successive quarters was an area of concern from the standpoint of their possible spill over to demand pressures, general price level as well as financial stability.