Street expects RBI to up repo, reverse repo rates by 25 bps

All eyes are on RBI Governor, D Subbarao as the central bank meets for the first time in 2011 to assess the monetary policy of the country.

The RBI and government's desperation to fight inflation has prepared the markets for a rate hike on January 25. According to CNBC-TV18 poll of bankers and economists, majority expect RBI to hike repo and reverse repo rates by 25 basis points each. Only a minority 6% expect a larger hike of 50 basis points. Will the RBI revise its FY11 inflation forecast higher? Fifty percent of those polled see RBI revising their inflation forecast to 6. 5% from 5.5% currently, 25% see it revised to 6-6.5% and only 6% see the RBI's forecast to be above 6.5%. Nineteen percent expect no change in the forecast. Inflation, therefore, continues to be a bigger worry for the markets than the tight liquidity condition. That's why 94% of those polled do not expect any change in the cash reserve ratio, which is the percentage of their deposits that banks must keep with the RBI as cash. Market also does not expect RBI to cut SLR further from 24%. Instead majority expect RBI to keep open the second liquidity facility which allows banks to borrow from the repo window twice every day. Despite tight liquidity condition, market does not expect banks to hike their lending or borrowing rates anytime soon. So, even with risng prices and tight monetary condition, growth for the current fiscal year remains intact. Nifty four percent of bankers and economists polled do not any change in the RBI's FY11 growth projection from the current 8.5% with an upward bias, whereas 6% expect it to be lowered to 8-8.5%.