The Reserve Bank of India is expected to hike rates by 0.5 per cent in its 'busy season' Credit Policy -- to be announced on October 26 -- due to concerns on inflation which is likely to remain over 7 per cent in the near future, the economic think-tank NCAER has said.
"All things considered and going by the past modus operandi of the RBI, it will raise rates by 0.5 per cent now, leaving room for further increases in December," the National Council of Applied Economic Research said in a report.
Asserting that the only way for interest rates was to move upwards, NCAER said that inflation had crossed 7 per cent and is likely to remain in that range for some time.
The Delhi-based NCAER said the prospects for inflation were not very good at present because of high oil prices and relatively poor monsoon.
Rejecting the finance ministry's concern that an upward revision in interest rates may slowdown growth, it said unlike in the old days when the market was not as important, today the rates have to reflect reality.
The other reasons for interest rates to rise were that the spiralling oil prices have 'frightened' the bond market and no bank wants to hold long-term securities which clearly indicates the rise in repo rates.
"There is also the paradox of excess liquidity in the system co-existing with a tight money market," it said, adding that there was also advance tax collections and increase in cash reserve putting pressure on interest rates.
Expecting a sharp increase in demand for credit from new private sector projects, it said: "There is no way an increase in interest rates can be prevented."
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