RBI hints at rate hike,says inflation tops agenda

Expect a hike of 25-50 bps in repo & reverse repo rates,say experts.

Interest rates could soon rise further if the hard talk by the Reserve Bank of India on the credit policy is any indication. The RBI on Monday said,high inflation could endanger the growth objective and containing inflation will have to be the predominant objective of monetary policy in the near-term.

Maintaining that inflationary pressures are emanating from sources that are not very sensitive to monetary policy measures,the RBI said,The inflation persistence led by stubbornly high food inflation in double digits for close to two years remains a major concern.

The central bank,which is expected to unveil the quarterly monetary policy on Tuesday,said upside risks to inflation from structural demand-supply imbalance in certain sectors and hardening global commodity prices have increased. Economists and bankers are expecting a hike of 25-50 basis points in repo and reverse repo rates in a bid to control the surging prices.

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Even if inflation softens in the near-term,sustaining a low inflation regime would require addressing structural rigidities from the supply side in specific sectors,particularly in those items where supply-demand imbalances exert disproportionately larger impact on the headline inflation, it said. High month-over-month (annualised,seasonally adjusted) inflation in recent months as also the rising price index of the non-food manufactured group,however,suggest the combined impact of both input costs and demand pressures, it said in its 3rd quarter review of the macroeconomic and monetary developments.

Growing demand-supply imbalances in several non-cereal food items have led to sharp relative price changes,which in turn have pushed up the headline inflation. While non-food manufactured inflation has been stable in a range of 5.1-5.9 per cent,the month-over-month increase in price index in recent months reflects emerging demand side pressures as well as rising input costs, it said.

In an environment of high food and fuel inflation,the risk of spillover to the core inflation through higher input costs and inflationary expectations,remains. As long as the structural factors underpinning the relative price pressures persist,the impact of anti-inflationary monetary policy could remain dampened, it said.

The Reserve Bank has raised policy rates six times since March 2010. As a result,along with the impact of the shift in the LAF mode from reverse repo to repo,the effective increase in policy rate has been 300 basis points,the RBI said.