RBI may raise key rates to tame inflation: ExpertsSeptember 15th, 2010 News: The RBI is likely to raise

policy rates by up to 25 basis points in its mid quarterly policy review on Thursday to tame inflation, which is still ruling near the double-digit mark, said experts. RBI deputy governor Subir Gokarn also expressed concern, saying "the inflation rates that the economy is now experiencing, both from the supply and the demand sides, are clearly a matter of great concern. It is incumbent on the government and the central bank to use all the means at their disposal to rein inflation." This is the first time that the Reserve Bank is coming out with a mid-quarter economic policy review. "The RBI will go in for a rate hike as robust growth in industrial output and healthy economic growth would give the RBI enough cushion to make money expensive," Deloitte Principal Economist Shanto Ghosh said.

The RBI has raised interest rates four times in 2010, upping key policy rates by 100 basis points as it tries to combat high inflation in Asia's third-largest economy. In its first quarter monetary review in July, the central bank had raised short-term lending and borrowing rates by 0.25 per cent and 0.50 per cent, respectively.

Following the increase, the repo rate stands at 5.75 per cent and the reverse repo rate at 4.50 per cent. India's GDP grew by 8.8 per cent in the first quarter, against 6 per cent in the April-June period last fiscal.

Furthermore, industrial output expanded by 13.8 per cent in July from 7.2 per cent in the corresponding month in 2009.

Central Bank of India expects Reserve Bank of India to maintain key rates in its mid-quarter policy review on September 16, chairman and managing director S Sridhar said Thursday. Meanwhile, speaking at the same event HSBC India head Naina Lal Kidwai also said she expected the central bank to maintain a 'status quo' in its rates, during the upcoming monetary policy on September 16.
Causes:
The decision has been guided by the need to contain inflation, which is currently at 8.5 per cent (food inflation has touched 15.10 per cent), as a hike

Effects:

This will adversely iimpact the cost of borrowing by the industry from the banks, especially by the SMEs. It may also the cost of home loan as well as consumer loans." Though the RBI had raised the two key policy rates, it kept Bank Rate, Cash Reserve Ratio (the portion of deposits that banks are required to keep with the central) and Statutory Liquidity Ratio (the portion of deposits that banks have to park in government securities) unchanged. hike in rates will lead to a rise in cost of funds for banks and will make loans expensive. This, in turn, will reduce consumption.

Conclusion: there is no room for complacency... We must continue to be vigilant and be prepared with the instruments of fiscal and monetary policy to use them as and when the need arises."
, there could be some revision in interest rate...The credit offtake, deposit inflow and what competititors are doing -all these business considerations will come into play for deciding the rate hike.