RBI to raise rates by 25 bps by end FY11: Poll

The Reserve Bank of India (RBI) is expected to stay pat on rates at its review on Thursday, with analysts anticipating the current tight liquidity conditions in the banking system to ease by end March, a Reuters poll showed.

Most of 23 economists surveyed expect the RBI to keep rates on hold on Dec. 16, while only one expects a 25 basis point increase in both rates in an attempt to further stamp down inflationary expectations.

The RBI's key lending rate, or the repo rate , currently at 6.25%, is seen at 6.5% by end of March 2011. The reverse repo rate , or borrowing rate, which stands at 5.25%, is seen at 5.5% by March.

The forecasts are unchanged from the previous poll conducted after the November 2 policy.

"We are looking for an extended pause in the tightening cycle as liquidity tightness will not ease significantly, so as such effective monetary tightening is already underway. Thus, RBI may not be compelled to raise rates despite inflation concerns remaining," said Shubhada Rao, chief economist at Yes Bank.

Liquidity in the banking system has been unusually tight since November, with banks borrowing an average of around Rs 100000 crore (USD 22.2 billion) from the central bank each day.

"To contain inflation expectations, RBI needs to tighten market rates, which are already on tighter trajectory due to liquidity. So adding further pressure by increasing policy rates may be exacerbating," Yes Bank's Rao added.

The headline inflation eased in line with expectations to its lowest level in a year in November. It rose just 7.48%  in November compared with 8.58% in October, data released on Tuesday showed.

India's economy, Asia's third-largest, is expected to expand by at least 8.5% in 2010/11, the fastest pace among major Asian economies after China.

Fourteen of 22 economists expect at least another 25 basis points increase in the repo rate by end March.

A majority of the economists said the central bank's tightening was appropriate, while one said it should be more aggressive and another said it should be less aggressive.

The RBI, which has raised its key lending rate by 150 basis points in six moves since mid-March, is expected to pause the tightening cycle at least until February.

Most analysts did not see any change in the cash reserve ratio , or the proportion of deposits that banks' need to set aside as cash with the central bank, either in December or later this fiscal year.

After the December meet, the central bank will review policy two more times this fiscal year.