RBI likely to hike repo by 25 basis points in mid-quarter policy

The Reserve Bank of India (RBI) is set to continue its fight against inflation despite shrinking economic data, as price rise is still a threat to the economy, say leading economists and bankers, who expect a 25 basis points (bps) hike in the key policy rate at Thursday's mid-quarter policy review.

Economists are unanimous that RBI has to continue battle against inflation, and therefore expect another 25 bps hike in the repo on June 16.

If that happens, it will be the 10th consecutive hike since March 2010. On May 3, RBI had gone in for a tough 50 bps each hike in repo and reverse repo rates (to 7.25 and 6.25 respectively), and left the mandatory cash reserve requirement at 6%.

"I expect a 25 basis points hike in the repo rate, because policy tightening has to continue till inflation is brought under control. But I don't expect RBI to go in for a 50 bps hike as it had done on May 3," Ernst & Young India partner and national leader for global financial services, Ashvin Parekh, told PTI.

Pointing out that the last policy action did pay off in controlling demand, Parekh said, "Since inflation is still high, monetary tightening has to continue to prevent the economy from heating up again. Another 25 bps hike is more likely as liquidity position is comfortable and so is the call money market which is also more or less stable now."

On the very low factory output data for April, Parekh said, "The IIP numbers were disappointing but there is no room for worry, it only indicates a slowdown in growth. It is not a bad thing as the economy was heating up. More fiscal measures can help stabilise prices as well support growth."

Industrial output in April more than halved to a paltry 6.3% against 13.3% year-on-year due to a poor showing by manufacturing and mining.