As prices move up, RBI may hike interest rates

With inflation now zooming to a two-year high of 6.12 per cent and industrial growth rate at 11-year high of 14.4 per cent

With inflation now zooming to a two-year high of 6.12 per cent and industrial growth rate at 11-year high of 14.4 per cent, the Central bank is likely to step in with measures to contain the price rise and surge in liquidity. Bankers are expecting a further hike in interest rates and other measures in Reserve Bank of India’s (RBI) quarterly review of the monetary policy later this month.

RBI governor YV Reddy has repeatedly said that he will take “appropriate and timely steps” to contain inflation which is raising its head again. With today’s numbers heading north, RBI is likely to further suck out liquidity from the system. Though RBI had hiked CRR (cash reserve ratio, or the percentage of deposits that banks must have on hand as cash) by 50 basis points to 5.50 per cent last month to check the surging liquidity, it has not created much impact.

“We can expect further hike in short-term rates like repo and reverse repo rates in the RBI’s credit policy later this month. I won’t be surprised if the RBI comes with some steps even before that. The biggest challenge before the RBI is to bring down inflation without affecting the growth and investments,” said a top official at a nationalised bank.

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Bankers also say that the Central bank is unlikely to make any changes in the statutory liquidity ratio (SLR) in the near future after the Cabinet recently decided to promulgate an ordinance to remove the SLR cap. If RBI adds to liquidity by reducing SLR, the move will put pressure on inflation.

“While rising inflation is the main target, RBI is also concerned about liquidity,” the official said. However, what’s causing concern is that any steps to check liquidity will hurt investments needed to sustain the 8 per cent plus growth in the economy.

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