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Worried over inflation, RBI may hike rates before policy: Experts

The RBI, which is slated to announce its quarterly review of the annual monetary policy on 27th July, may effect a 0.25% hike each in its repo and reverse repo rates well before the policy

Chances of the Reserve Bank of India (RBI) hiking its short term policy rates by at least 0.25% ahead of its July policy brightened today with the inflation shooting past 10% in May, reports PTI.

The inflation, measured by Wholesale Price Index (WPI), rose to 10.06% in May against 9.59% in April and a revised figure of 11.04%. It is expected to remain so till August on account of base effect and higher food and fuel prices.

The RBI, which is slated to announce its quarterly review of the annual monetary policy on 27th July, may effect a 0.25% hike each in its repo and reverse repo rates (overnight lending and borrowing rates) well before the policy, Bank of Baroda, chief economist, Rupa Rege Nitsure said.

"Inflation is not coming down structurally and demand for foodgrains is growing substantially. I feel that RBI will have to raise rates by 25 basis points (bps) even before the policy," Ms Nitsure said.

The RBI hiked its policy rates by 0.5% each and cash reserve ratio or the mandatory cash reserves for banks by 1% so far this year to unwind the monetary stimulus provided after Lehman-crisis shook the global markets and threatened the domestic economy.

There are expectations that the RBI, in the face of tight liquidity conditions owing to third generation (3G) auction and advance tax outgo, may resort to hiking only the reverse repo rates and may leave the repo unchanged until cash flows ease in the system.

Around Rs38,000 crore fee from winners of broadband wireless access (BWA) auction and nearly Rs30,000 crore advance tax payment will move out of the system in the next 10 days, which has left the money markets worried.

"Yes, we do see possibilities (of pre-policy rate hike). Inflation being where it is, there is a chance of rate hike before the policy. More likely it would be a hike in reverse repo rate," Ashutosh Datar, an economist with IIFL, said.

Planning Commission deputy chairman, Montek Singh Ahluwalia today said the RBI should take policy steps to curb the galloping prices, which has hit the common man and is now spreading to the manufactured items.

Tight liquidity conditions have already pushed up the short-term rates while on the other side, banks have also indicated that lending rates in the system will move northward on another round of rate hike from the central bank.


Daily Market View: Caution at current levels

There is not much of upside from the current levels without a decline first

The market ended higher on a six-week high on Monday, buoyed by positive sentiments that spurred global equity markets. The Sensex closed the session at 17,338, up 273 points (1.6%) and the Nifty settled at 5,197, up 78 points (1.5%). The indices started the day with a surge, taking cues from the Asian markets. Trading was range-bound till early afternoon, after which the bourses witnessed a strong uptrend, ending in the green for the fourth day in a row.

Asian markets were up for the third consecutive day on Monday as investor sentiment was upbeat in the US on speculation that demand for products and resources will increase in the world's biggest economy. Key benchmark indices in Japan, South Korea, Indonesia, Hong Kong, Taiwan and Singapore were up by 0.7% to 1.8%. China's markets are closed from Monday to Wednesday for the Dragon Boat Festival.

The US markets were up on Friday, on a report stating that consumer confidence is improving. The Dow Jones industrial average was up 38 points (0.4%) to 10,211. The Standard & Poor's 500 index was up 4.7 points (0.4%), to 1,091 and the Nasdaq Composite was up 24.9 points (1.1%), to 2,243.  

The Irish Central Bank governor said that the crisis in the Eurozone has worried investors, dragging down the euro and global markets. However, European leaders will now attempt to convince the financial markets that the crisis can be contained by taking tightening measures.

Back home, India may be able to reduce the fiscal deficit to 4.5% of its gross domestic product (GDP) by March 2011 on revenue earnings from third-generation (3G) spectrum. The sale of 3G mobile phone licences and broadband access will bring in $23 billion, which will help the government reduce its Rs4.57 trillion borrowing for the fiscal year. India had projected a budget deficit of 5.5% for the fiscal year that ends in March 2011, down from a 16-year high of 6.9% of GDP in the last fiscal year.

The wholesale price index (WPI) rose an annual 10.16% in May, driven by higher food and fuel prices, government data showed on Monday. This has increased the possibility of the Reserve Bank of India (RBI) raising interest rates at its meeting in July.

Foreign institutional investors (FIIs) were net buyers on Friday, purchasing stocks worth Rs820 crore. Domestic institutional investors (DIIs) were net sellers, offloading stocks worth Rs213 crore.  

Compucom Software (up 5.3%) has been awarded the prestigious School Computer Education Project worth Rs77.77 crore by the government of Rajasthan. This order is to provide computer education on BOOT basis in 1,550 government schools in the state.Prajay Engineers Syndicate (up 3.2%) announced that one of its subsidiaries has received foreign investment of Rs70 crore for its ongoing construction and development project at Hyderabad, which envisages development of a residential town ship of approximately 45,00,000 square feet.  

The board of Uniply Industries (down 1.6%) discussed the proposal to set off accumulated losses against its share premium account. The board observed that the accumulated losses were mainly on account of non-core/extra-ordinary activities. Consequent to their hiving off last year and with the anticipated improved operating results in the coming period, the accumulated losses could be set off against the profits that accrue in future. Keeping this in view, the board decided to drop the proposal of setting off accumulated losses against the share premium account.

Mundra Port and Special Economic Zone (up 1.3%) has laid the foundation stone for doubling the existing Mundra-Adipur 57 km private railway line to meet the growing demand of the port. This additional line will run parallel to the existing one. The new line will have four crossing stations and 99 bridges. It can handle 25-tonne axle-load wagons at 100kmph. The line will be commissioned in two phases. The first phase of 30km will be commissioned by June 2011 and the rest by the end of 2011-12.


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