RBI May Resort To Another Rate Increase In Sept: Experts

Experts believe that the Reserve Bank of India or RBI may continue with its tight monetary policy stance to check inflation and announce another increase in key interest rates in September, though the global economic environment is on a downslide. However, while the RBI is likely to go for another interest rate hike at its next mid-quarterly policy review on September 16, it will not be very aggressive, they said. Global research firm Macquarie economist Tanvee Gupta Jain said though the RBI would continue on its anti-inflationary attitude, adverse global environment suggests that it might become less aggressive. On the other hand, Morgan Stanley also reckons, "The RBI will continue with its anti-inflationary stance with one more 25 basis points hike to anchor inflation expectations decisively, barring a further deterioration in the growth outlook." The RBI has increased the repo (borrowing) rate by 50 basis points to eight percent and the reverse repo (lending) rate by 50 basis points to seven percent at its latest monitory policy review in July. The apex bank has increased the key policy rates 11 times since March last year, to rein in inflation, which has been hovering above the 9 percent mark since December last year. Headline inflation stood at an eight-month low of 9.22 percent in July. However, this was much above the RBI's comfort zone of around five percent. Economic Advisory Council to the Prime Minister of India (PMEAC) in its Economic Outlook for 2011-12, had projected inflation to remain high at around nine percent till October, before moderating to 6.5 percent by March next year. Notwithstanding the adverse global economic scenario, better-than-expected June factory output data is likely to prompt the apex bank to go for another round of rate hikes. In June this year, the Index of Industrial Production grew by 8.8 percent, compared to 7.4 percent in the corresponding period last year. However, the recent negative global developments, such as, the sovereign debt crisis in Europe and increasing concerns that the US economy may slip into recession after its long-term debt rating was lowered a notch to AA+ by Standard & Poor's are expected to eventually affect the Indian economy to some extent, the experts added. 

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