RBI Policy Preview - 25bps hike in policy rates anticipated:: Edelweiss

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In the forthcoming quarterly review of the monetary and credit policy on January 25, 2011, the Reserve Bank of India (RBI) is likely to raise repo and reverse repo rates by 25bps each. In the previous (December) policy review, the central bank had kept both rates unchanged and injected liquidity in the system, keeping excessive liquidity deficit in mind. Now, as liquidity conditions are beginning to improve and inflation has rebounded much above the comfort level, RBI is expected to focus on inflation. Headline inflation has rebounded largely due to high food prices. Sticky non-food primary articles’ and non-food manufacturing products’ inflation also contributed to the rise. Food prices are on an uptrend due to temporary and structural reasons. As the economy is growing close to trend, the risk of structural food inflation spilling over into prices of other commodities is significant. Additionally, inflation pressure persists both from domestic demand and higher global commodity prices. Therefore, in an effort to anchor inflationary expectation and control the spillover of high food inflation into manufacturing inflation, the central bank is likely to resume tightening by raising repo and reverse repo rates 25bps each, keeping the LAF corridor intact at 100bps.