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India : Bankers expect key rates to go up 25-50 bps.

Bankers and analysts expect a 25-50 basis point (bps) hike in repo and reverse repo rates in the Reserve Bank of India monetary policy review on Tuesday. However, they do not expect any change in the cash reserve ratio due to the tight liquidity.

They feel inflation, rather than growth, will be the major concern for the RBI. The money markets have already factored in a 25 bps hike in the repo and reverse repo.

However, comments by Dr C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, on the need for a strong monetary policy action to tackle inflation, has raised fears that the RBI may consider a 50 bps hike in the key rates, said a bank official. The RBI's baby steps have not proved very effective. The last 25 bps hike has not been able to even rein in inflationary expectations. The RBI may now hike repo and reverse repo by 50 bps, said Dr Rupa Rege Nitsure, Chief Economist, Bank of Baroda.

Headline Wholesale Price Index inflation has been in double digits for the past few months. In June, it was at 10.55 per cent, against 10.16 per cent in May.

We are looking at a 25 bps hike in the repo and reverse repo rates and no change in the CRR. However, there is an outside chance that the RBI may hike reverse repo by 50 basis points to raise the lower end of the Liquidity Adjustment Facility corridor if it considers inflation to be a structural issue, said Dr Shubhada Rao, Chief Economist, YES Bank.

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Date:Jul 26, 2010
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