Tightening to Stay till Prices Cool: RBI Central bank set to raise key rates by 25 bps today

The Reserve Bank of India, or RBI, has said the broad thrust of monetary policy will have to be on tightening despite risks of slower growth, in what is being perceived in the financial markets as an indicator that the central bank is set to raise interest rates again on Tuesday. In its latest report on macro and monetary developments of the economy, the RBI said monetary policy would have to preserve its tight monetary stance till there is credible evidence of inflation trending close to a level within the central bank's comfort zone of 4-4.5%. Taming inflation is an unfinished task considering that price pressures still persist, it said. 

The report, unveiled on the eve of the policy review on Tuesday, is a pointer to another increase in the key repo rate, or the rate at which the RBI lends to banks against government securities. All 15 market participants polled by ET over the weekend were unanimous the central bank would raise repo rate by 25 basis points (1 bps is 0.01%). It has raised rates 10 times since March 2010 to cool inflation, but its job is far from over with headline inflation still over 9%. The RBI has projected inflation to come down to 6% by the end of this fiscal. 
The macro report said if the monsoon turns sub-normal, upside risks to the projected moderation in inflation during the second half would go up. Not only is the headline inflation still hovering around 9%, but non-food manufacturing inflation also remains significantly high at above 7%, according to the RBI's assessment. It also cautioned against a potential impact of the Eurozone crisis on the domestic economy. "Challenges from the policy perspective have become even more stringent with increased risks to growth, though inflation is likely to remain high in near term. Risk factors have emerged that could adversely impact aggregate demand," the report said.