Bankers predict 25 bps hike in policy rates by RBI

The Reserve Bank of India (RBI) is set to continue its fight against inflation despite a slowdown in economic growth, as price rise is still a threat to the economy, say leading economists and bankers, who expect a 25 basis points (bps) hike in key policy rates at Thursday's mid-quarter policy review.

Economists are unanimous that RBI has to continue its battle against inflation and expect another 25 bps hike in the repo rate on June 16.

If that happens, it will be the tenth hike since March 2010. On May 3, RBI had gone in for a tough 50 bps hike in both the repo and reverse repo rates (to 7.25 and 6.25, respectively), but left the mandatory cash reserve requirement at 6 per cent.

"I expect a 25 basis points hike in the repo rate, because policy tightening has to continue till inflation is brought under control. But I don't expect the central bank to go in for a 50 bps hike as it had done on May 3," Ernst & Young India partner Ashvin Parekh said.

Read how you can deal with rising interest rates and still get that loan

Pointing out that the last policy action did pay off in controlling demand, Parekh said: "Since inflation is still high, monetary tightening has to continue to prevent the economy from heating up again. Another 25 bps hike is more likely as liquidity position is comfortable and so is the call money market, which is also more or less stable now."

On the very low factory output data for April, Parekh said: "The IIP numbers were disappointing, but there is no room for worry, it only indicates a slowdown in growth. It is not really a bad thing, as the economy was heating up. More fiscal measures can help stabilise prices as well support growth."

READ: Rate hike alone cannot battle inflation, says KV Kamath

Industrial output in April more than halved to a paltry 6.3 per cent, as against 13.3 per cent in the corresponding period of the previous year, due to a poor showing by the manufacturing and mining sectors.