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Economists: RBI may hike key rates by 25 bps to check inflation
April, 18th 2011

With inflation showing no signs of moderation, economists expect the Reserve Bank to hike key policy rates by at least 25 basis points in its annual monetary policy to be unveiled on May 3.

The headline inflation (WPI) stood at 8.98 per cent for March, much above the RBI's projection of 8 per cent, fuelling speculation that the central bank may go in for another hike in the repo (lending) and reverse repo (borrowing) rates.

"We are definitely expecting a rate hike. While we do see a 25 basis points (bps) hike in repo and reverse repo rates, it is also likely that the RBI could hike both rates by 50 bps each," Yes Bank Chief Economist Subhada Rao said.

Referring to 8.98 per cent inflation in March, she said: "These are very, very disturbing numbers. The sharp upward movement in core inflation is at 29-month high. For RBI this is going to be of great concern, as demand is extremely robust".

Expressing similar views, Crisil Chief Economist D K Joshi said, "We expect the RBI to hike repo and reverse repo rates by 25 bps each in its May policy review".

"Another hike of 25 bps in the next policy meeting is a certainty," opined Tushar Poddar, Chief India Economist at Goldman Sachs .

The repo rate is 6.75 per cent and reverse repo is 5.75 per cent.

In order to check rising prices, the RBI has raised the key policy rates eight times since March 2010.

The rise in wholesale price inflation was mainly on account of increasing prices of manufactured items, milk, vegetables and fruits. The WPI stood at 8.31 per cent in February.

Besides, food inflation, which accounts for nearly 15 per cent of overall WPI inflation, touched the year-low level of 8.28 per cent for the week ended April 2 as prices of certain essential items like pulses and wheat declined, from 9.18 per cent in the previous week.

"Food inflation will not have much of a bearing on the RBI's decision making process. From a policy perspective non-food inflation is very critical and it is rising. Looks like inflation will remain high this year", Joshi said.

Right now, inflation is suppressed because the fuel price increases globally have not been passed on to Indian consumers yet. If they are transferred, inflation will be much higher than it is at present, Joshi added.

On an annual basis, fuel and power prices went up by 12.92 per cent, driven mainly by a 23.14 per cent rise in petrol prices and a 14.99 per cent jump in cooking gas ( LPG )) rates.

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