RBI may again raise repo rate by 25 bps by July

RBI may again raise repo rate by 25 bps by July: Economists Woes of the UPA government on the price front are likely to continue with inflation expected to reach the double digit mark in the weeks ahead, which may force the Reserve Bank to raise short-term lending rate by another 25 basis points. Despite the host of measures taken by the government and RBI, inflation has touched the seven-year high of 8.75 per cent and is likely to go up further next week after the index captures the impact of fuel price hike announced on 5th June. "Rising inflation rate may force the RBI to raise repo rate (short-term lending rate) by at least 25 basis points before the July policy announcement," HDFC Bank chief economist Abheek Barua told a news agency. With the impact of fuel prices hike getting reflected in the inflation data, the rate could rise to a 13-year high of 10 per cent, opined Lehman Brothers economist Sonal Varma. "We expect another 25 basis points hike in the repo rate in quarter three of 2008 and one percentage increase in cash reserve ratio during this financial year," she said. RBI has, after a gap on more than a year, increase the repo rate to 8 per cent from 7.75 per cent to contain inflation by curbing demand. Even according to government estimates, inflation may peak at 9.70 per cent in October before petering out. Inflation, which has already crossed 8.7 per cent for the week ended 31st May, may touch 9.5 per cent in June, following the government decision to raise prices of petrol, diesel and cooking gas, official sources said. Going by the projection, it seems inflation will remain much above the RBI's tolerance level of 5.5 per cent for 2008-09. For the most part of the current fiscal, sources said inflation is likely to remain above 7 per cent. According to Bank of Baroda Chief Economist Rupa Rege Nitsure, there is a strong possibility of inflation breaching the 10 per cent mark. "RBI will pursue aggressive monetary tightening and one could perhaps witness a CRR hike plus a repo rate hike in the July policy (review)," she said. RBI had jacked up CRR by 0.75 per cent in April, sucking out over Rs 27,000 crore from the banking system. Conforming to the other economists views, Yes Bank Chief Economist Shubhada Rao said further monetary tightening can be expected in the next policy. There could be a combination of CRR and repo rate hike, Rao added. Petrol and diesel prices, which have gone up by 11 per cent and 8.5 per cent respectively, will increase inflation by about 0.3 per cent, while the increase in the rate of LPG cylinder would add 0.2-0.3 per cent to the index surge. The cascading effect of diesel price hike would manifest in the next 3-4 months and may spike the rate of inflation by another 0.3 per cent. However, pinning hopes on rain, Planning Commission Deputy Chairman Montek Singh Ahluwalia had said that a good monsoon would help in controlling the prices of commodities.

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