RBI can choose to increase up to 50 basis points in the repo rate

Mumbai: The Reserve Bank of India, part of a group of global central banks to control inflation, is likely to raise the official interest rate this week, according to a survey by ET. But the amount of the increase is uncertain as it considers moving parts such as crude oil, government actions on taxes and the impact of monsoons on food grain production to predict future prices.

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The survey suggests that the policy's repo rate could be raised by 25-50 basis points, with the rates at which the Reserve Bank of India lends to banks could be increased to 4.9% from the current 4.4%. Nearly half of the 23 market participants, including traders, economists, fund managers and financial institution managers, expect an increase of 50 basis points, or half a percentage point. In contrast, others expect it to be between 25 and 40 basis points.

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After the unexpected liquidity ratio and liquidity action in May, the Reserve Bank of India could redouble its efforts by raising the Cash Reserve Ratio (CRR), the ratio of deposits banks hold with the central bank, to prevent the CPR from going above its level. The upper tolerance level is 6%.

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While the rate hike is a foregone conclusion, investors will be watching inflation expectations, and the eventual final rate in this bullish cycle as the Reserve Bank of India (RBI) continues to look to steer the economic recovery through increased investment.

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The Monetary Policy Committee (MPC) can raise inflation expectations and lower growth expectations. Still, its size will depend on reading the government's invisible hand in manipulating tax rates to keep prices in check. "To strike an appropriate balance between slow growth and expected moderation in inflation, the pace of price hikes must be adjusted, especially after the tax cuts of the Centre," said A Balasubramanian, CEO of Aditya Birla MF. "It is unlikely that interest rates will be raised significantly. The possibility of a good monsoon will also start to affect consumer prices."

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The Monetary Policy Committee will announce its decision on Wednesday.