Even as India's annual inflation rate touched 10.16 per cent in May, Finance Minister Pranab Mukherjee on Monday ruled out the possibility of interest rates rising in the short term. He said he expected inflation to be on the higher side till the middle of July.
However, K C Chakrabarty, deputy governor, Reserve Bank of India, did not rule out a mid-term policy action. Banks, too, expected an upward bias in interest rates.
"Inflation is surely a matter of concern, because food inflation is rising and the wholesale price index has reached a double-digit figure. It will continue till the middle of July, as after that we will get to know the trend of monsoons. Also, the pressure on food prices will probably start coming down," Mukherjee said at a press conference after a meeting with chief ministers of eastern and north-eastern states and heads of public sector banks here on Monday.
On if a rise in interest rates was on the cards, he said, "No, I am not thinking of raising interest rates now. There will be inflationary pressure till July, but this time I am not altering interest rates."
On the supply side, the government had taken steps like easing imports of pulses, sugar and edible oil to control inflation, he said.
Data released by the commerce ministry showed prices of food articles rose 16.49 per cent last month, against 16.87 per cent in April, while that for fuels rose 13.05 per cent.
"On the monetary side, we took steps in the last policy, and mopped up some liquidity. We have to keep in mind that the legitimate credit requirement of the industry is not affected," the finance minister added.
In sync with Mukherjee's view, Chakrabarty said the central bank would wait for a few months before taking any action on the monetary side, as things were not going "out of hand"
However, the probability of a monetary action before RBI's July 27 policy review was 50-50," Chakrabarty said.
"Things are not going out of hand. We have to see for a few months before we are worried about inflation. Inflationary pressure is there and we have to wait and watch and move in a gradual manner. Inflation will definitely come down. If it does not come down, we will take action," he added.
However, banks are expecting an upward bias in interest rates, in view of a gradual squeeze in liquidity.
O P Bhatt, chairman and managing director, State Bank of India, said, "At this point in time, there is an upwards bias in interest rates. If any bank increases rates, it will be by 25 basis points. But we have to wait and watch for the policy in July. Liquidity is tightening as RBI is unwinding stimulus and inflation is rising."
Bhatt later said he did not foresee any immediate rise in interest rates.
"Inflation is a cause for concern, but we will have to see the long-term trend," Bhatt added.
Lending to telecom companies, almost to the tune of almost to Rs 68,000 crore, to pay for spectrum for third-generation (3G) mobile services and advance tax payments of up to Rs 40,000 crore have led to a liquidity squeeze.
A C Mahajan, chairman and managing director of Canara Bank, said, "There is an upward bias in interest rates, as liquidity is drying up."
