RBI likely to hike rates by 25 bps, banks to follow suit

By Saikat Das

Reserve Bank of India (RBI) governor  Duvvuri Subbarao  is unlikely to spring any surprise in the monetray policy meet next Tuesday. Despite high inflation figures that makes this policy meet very crucial, Subbarao  is expected to continue with his calibrated approach in hiking policy rates  by 25 basis points  only. In its recent report, the Asian Development Bank has warned that rising food and fuel prices could hurt growth in India and push millions of countrymen into extreme poverty.

Going with the street consesus of a 25 bps hike each in repo and reverse repo rates, most banks are bracing up for another round of lending rate hikes post the RBI policy announcement.  "Interest rates are near the peak . If RBI hikes policy rates (repo and reverse repo), we would also pass it on our borrowers" said S Raman, CMD, Canara Bank . He expects the RBI to hike both by 1% each in FY 2011-12. Raman, however, sees a limited scope of  a deposit rate hike as we are already ahead of the curve.

Repo is the rate (6.75%) at which banks borrow money from RBI. Reverse repo is the rate (5.75%) at which banks lend to RBI.

"The regulator will keep a balance approach between inflation and growth,