RBI to hike Repo Rate by 50 Basis Points

The Reserve Bank of India will choose a larger 0.50 percent rate hike in its next monetary policy review in June to protect medium-term economic stability in an unpleasant inflationary environment, UK brokers said. According to Barclays economists, central banks are likely to revise their inflation expectations to 6.2-6.5%, well above the 2-6% tolerance limit.

In terms of growth, the RBI said it would review its 2011 GDP expansion from the previous 7.2% to 7%. Adding that the quantum of a rate hike can be 0.50 %, Chief economist Rahul Bajoria said, “We expect the RBI to deliver another large interest rate hike in June as above-target inflation could undermine medium-term economic stability.”

The RBI surprisingly raised the benchmark interest rate by 0.40% on May 4th. Governor Shaktanta Das earlier said in a June review that the possibility of being raised again is a "no-brainer."

Further tightening of liquidity is undeniable, according to brokers, adding that in the basic case, the reserve requirement ratio is expected to increase by another 0.5% to a level of 5%.

In a review on May 4, RBI raised the CRR (Cash Reserve Ratio). This means that the amount of time deposits a bank needs to park at RBI has been increased by 0.50% to withdraw an additional Rs.87,000 crore from the system.