RBI hints at rate hike if inflation surges

The Reserve Bank on Monday hinted that it would further tighten money supply to control inflation, which touched a 19-month high of 10.16% in May even as finance minister Pranab Mukherjee said double-digit inflation was a matter of concern but is expected to ease mid-July onwards when monsoon trends are clearer.

?Inflation will definitely come down…if it does not come down, definitely Reserve Bank will act,? RBI deputy governor KC Chakrabarty told reporters on the sidelines of a bankers? conference in Patna.

SBI chairman OP Bhatt, also present at the bankers? conference, said the liquidity position in the system is tight and interest rates can go up by 25 basis points in the coming months.

?There is an upward bias on the rates…If any bank increases it, it will be a minimum of 25 basis points,? Bhatt said. The chairman, however, clarified that the position will be clear only after the RBI monetary review scheduled for July 27.

Finance Pranab Mukherjee, who met public sector banks chiefs in Patna, said ?High inflation will continue till middle of July. After July, when the trend of monsoon will be well known, inflationary pressure on food items will come down.?

When asked if RBI would take steps in the wake of double-digit inflation, Mukherjee said, ?I am not thinking of raising interest rates at this juncture. It will be done by Reserve Bank of India but of course, RBI consults with the finance ministry.?

Mukherjee added that monetary policy will ensure that legitimate credit demand in the country would remain unaffected by any tightening of the monetary policy by RBI.

RBI has already raised key rates twice this year to curb money supply, as part of efforts to check food inflation from spreading to manufactured goods. On the possibility of raising the key policy rates and ratios before the scheduled date of monetary policy review on July 27, Chakrabarty said, ?Possibility is always 50-50. If need be, anything can be done.?

Annual inflation, measured by movement of the wholesale prices, rose to 10.16% in May, as per the provisional figures released on Monday. The final figures for March too stood revised at 11.04 % from 9.90%

reported earlier.

The inflation, Chakrabarty hoped, would start easing in the next one or two months.

Op Bhatt, however, said that The central bank would have to draw a balance between the need to fuel economic growth and contain inflation which has crossed the double-digit mark (10.16 per cent) in May. ?There is an upward bias (in the interest rates). The position will get crystallised only after the July monetary policy, because then we will know what they (RBI) are thinking of and what they want us to do,? Bhatt added.

On the implementation of the base rates from July 1, Bhat said SBI is fully prepared for the new interest rate regime. ?We have already indicated that the base rate would be between 7.5% and 8.5%,? he added.

The apex bank began unwinding its monetary stimulus by upping the requirements for banks to keep cash with it (CRR) by 0.75 percentage points in January and short-term lending and borrowing (repo and reverse repo) rates by 0.25 percentage points.

In its annual monetary policy in April this year, the RBI hiked key short term rates and the CRR by 25 basis points each.