NEW DELHI: RBI is likely to increase its key rates again in credit and monetary policy review meeting on July 27. High growth in credit offtake and inflationary pressure left RBI with little choice but to raise the key rates further, feel bankers and analysts.

Research houses like Nomura, Edelweiss and Crisil expect that RBI will increase the repo rate — the rate at which RBI lends short term funds to banks — and reverse repo rate — the rate at which banks park their surplus funds with RBI — by at least 25 basis points each. As banks are facing shortage of funds, RBI is not expected to increase the cash reserve ratio (CRR) — amount of funds that banks need to keep with the central bank. The July 27 policy decisions are expected to push up the retail interest rates. But RBI will also ensure required availability of liquidity so that plans of companies are not affected.

The RBI may resort to even steeper hikes in repo and reverse repo rates, said D K Joshi, chief economist of Crisil, though bad condition of European economy and its impact on India's growth is a concern. He maintained that in present scenario, when growth is expected to be strong at over 8% and inflation a prime concern, RBI will tweak the repo and reverse repo rate by at least 25 basis points to 5.75% and 4.25% respectively.

Sonal Varma of Nomura Securities said CRR is likely to be left untouched as banks are facing liquidity shortage. On last Friday, banks borrowed over Rs 68,000 crore from RBI under liquidity adjustment facilities.

Banks are witnessing strong credit growth at 21.7%, up to July 2, 2010. The central bank had projected an annual credit growth of 20%. Against this, deposits growth is very sluggish at 14.9%. So, according to one banker, interest rates are going to firm up as banks will be forced to raise deposits rates to mobilize funds. This will force them to raise lending rates also.

However, an aggressive RBI stance is unlikely as it could affect capital inflow from foreign countries, said a senior official at a public sector bank. Because of slowdown in developed countries, interest rates are still very low. If India raises rates, capital from abroad may start flowing into the debt market and RBI will like to avoid this scenario, he added.

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