RBI may hike key rates early next fiscal

The central bank may unwind its accommodating monetary policy by hiking key rates in the first quarter of financial year 2011.
The Reserve Bank of India could resort to monetary tightening to counter the liquidity pressure that could emerge from the expected pick-up in credit in the busy October-March season and Government (both Central and State) borrowings in the second half. Further, it could also help stem the rising inflation.
As of now there are no concerns on account of liquidity — banks have collectively deployed surplus aggregating about Rs 80,000 crore (on October 1) at the RBI’s reverse repo window and almost Rs 1.50-lakh crore in liquid schemes of mutual funds. However, inflation, which at least in Wholesale Price Index (WPI) terms is currently benign, is slowly rearing its ugly head.
Bankers, however, see pressure building up on these two fronts from the beginning of the new financial year.
Once credit demand gathers pace, banks will unwind their investments in reverse repo and mutual funds. In the financial year so far (April 1 till September 11), credit uptake by various segments of the economy from banks was tepid at Rs 50,408 crore (Rs 1,33,644 crore in the year-ago period).
“Given the current liquidity position, banks can comfortably meet the demands of trade, industry, agriculture and retail segments,” said the treasury head of a public sector bank.
However, inflation is a cause for concern for both the Government and the central bank and this could force the latter to tighten the rates in the first quarter of FY2011, said the banker.
The WPI, which has nudged up to 0.83% in the 12 months to September 19, above the previous week’s annual rise of 0.37%, is expected to touch 6% by March next.
A Nomura report said, “We expect both growth and inflation to surprise on the upside in the coming months. As such, we maintain our view that the RBI will hike its repo/reverse repo rates and CRR by 125 basis points each by end-2010.”