Monday, November 29, 1999

RBI hints rate hike before July review

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As the inflation rate picked up pace unpredictably in May, the RBI today signalled a hike in rates before its scheduled July review despite concerns over Europe's debt crisis. "Inflation is a big worry for the central bank and we are constantly monitoring the situation. The action on monetary policy can be done before or after the policy," RBI deputy governor KC Chakrabarty told reporters on the sidelines of a seminar here.Comparing India's case with the international situation on inflation, Chakrabarty said, "As of today, inflation is definitely a cause of worry. What we observe is that the international situation is not that volatile and it has some adverse implications. But what worries us is, no doubt, our domestic inflation," Chakrabarty said. Experts said the move that has been announced by the central bank on Wednesday was very much anticipated by the market. As far as the rate hike is concerned, they expect a possible rate hike of 25-50 basis points soon. "I expect at least a 25 basis point hike in key rates in the next few days followed by another 25 basis points in its July 27 monetary policy meet," an expert said.The RBI also indicated that it might tweak the monetary policy any time to contain inflation, although it sent signals to the contrary at Wednesday's event where it announced a move to release Rs 20,000 crore into the banking system. With the move, the RBI opened a window and allowed people to come in and sell bonds in order to deal with liquidity issues. The RBI is prepared to push in about Rs 10,000 crore by buying these bonds from banks and mutual funds only. However, this would not suffice to curb a cash crunch of nearly Rs 1 lakh crore. The RBI, which started exiting its easy money policy stance in October last, is widely expected to hike key short-term lending (repo) and borrowing rates (reverse repo) by 0.25 per cent at its quarterly policy review on July 27.

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