The Reserve Bank of India (RBI) is likely to increase key policy rates by at least 25 basis points in its first quarterly review of the monetary policy on Tuesday to tame inflationary expectations.

“I think there could be a small hike in the repo and reverse repo rate of say 25 basis points,” HDFC Managing Director Renu Sud Karnad told PTI.

High inflation may prompt the RBI to tighten money supply by raising both the short-term lending (repo) and borrowing (reverse repo) rates tomorrow, say bankers.

“There is a clear bias for policy rates to move up for the reason that inflation is still very high and inflationary expectation is to be contained. The bias is going to be upward,” Union Bank of India Chairman M.V. Nair said.

“At that point in time, if the funding cost goes up, then the base rate will also go up. During the year, there is a clear bias for interest rates to move up,” he added.

Punjab National Bank Chairman K.R. Kamath said whatever decision the RBI takes, the banks will respond accordingly.

Mr. Kamath further said that if the RBI raises the cash reserve ratio, that would put pressure on the cost of funds.

Earlier this month, RBI had raised the repo and reverse repo rates by 25 bps to tame inflation. Inflation is still in double-digits, led by high food prices, and stood at 10.55 per cent in June. But food inflation eased marginally to 12.47 per cent for the week ended July 10 from 12.81 per cent in the previous week.

Meanwhile, the Prime Minister’s economic panel PMEAC has also pitched for tightening money supply, as current inflation rate is more than double the comfort level and can hurt high economic growth in the medium-term. “A bias towards (monetary) tightening is necessary,” the Prime Minister’s Economic Advisory Committee (PMEAC) said.

PMEAC head C. Rangarajan said that if the RBI does not take strong monetary action to contain inflation, it can opt for a series of “baby steps” after its July 27 monetary review. “Evidence on the funds flow side, as well as on the output side, clearly shows a strong economic recovery.

In the backdrop of inflation rates that are more than twice the comfort-zone, it is important that monetary policy completes the process of exit and move towards a bias on tightening,” he said.

Royal Bank of Scotland Managing Director and Head of Markets Ramit Bhasin said the RBI is likely to hike its short-term lending rate by 0.5 per cent to 6 per cent and the short-term borrowing rate by 1 per cent to 5 per cent through 2010.

“As we go forward, there would be higher capital inflows and the current liquidity crunch will ease sooner than expected. According to our estimates, the RBI is likely to up the repo by 0.5 per cent and reverse repo by 1 per cent by December,” Mr. Bhasin said.

Kotak Mahindra MF’s Lakshmi Iyer said it is widely expected that RBI is going to hike rates by 25 bps.

Echoing similar view, Crisil Chief Economist D.K. Joshi said the focus for the RBI in the near-term would remain on curbing inflation. “We expect the RBI to hike the repo and reverse repo rates by 25 bps at on July 27,” Mr. Joshi said

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