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RBI to hike rates by 50 bps by March to ease prices
January, 11th 2011

StanChart Bank expects food prices to push up overall inflation to 8.3 per cent in December, which will prompt the Central Bank to raise policy rates by 50 basis points in the current fiscal.

The bank said in its report that it expects the first rate hike of 25 basis points to be announced by RBI at its January 25 policy review. "We expect 50 bps of interest rate hikes before the end of 2010-11 (ends 31 March), split evenly between the next two meetings, which are scheduled for January and March," said the report.

According to the report, unexpected reversal in the seasonal pattern of food prices means the wholesale price inflation is likely to rise to 8.3 per cent in December 2010 from 7.48 per cent recorded in the previous month.

The December inflation figures are to be released later this week. "We expect a total of 75 basis points of hike in the repo and reverse repo rates (currently at 6.25 per cent and 5.25 per cent, respectively) in calendar year 2011, with the possibility of further hikes, if inflation is more stubborn than expected," says the report.

The inflation, mainly the food inflation, has been at uncomfortably high levels for the last few weeks. Soaring onion and other vegetables' prices led to the sharp rise in food inflation at 18.32 per cent for the week that ended on Christmas, up from 14.44 per cent recorded in the previous week.

The rise in food prices has prompted Finance Minister Pranab Mukherjee to raise overall inflation forecast to about 6.5 per cent by March end from earlier estimates of 6 per cent. Standard Chartered Bank expects inflation to be in the range of 6.5 to 7 per cent by the end of this fiscal.

"We expect WPI inflation to be in the range of 6.5-7.0 per cent by March 2011. 2011-12 is also likely to be a tough year from an inflation perspective, with average WPI inflation expected to remain at a high level of 6.5 per cent," it said.

The report added that inflation may once again surpass 7 per cent level in second half of the next fiscal, posing a further challenge to the setting of monetary policy.

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