Amid a very tight liquidity scenario and inflation stabilising, bankers feel that RBI may not tinker with the interest rates on Tuesday, while reviewing the monetary and credit policy. However, some economists feel to ensure that inflation does not rise further, RBI may decide to hike key rates.

In fact, RBI is in a dilemma. While steps are needed to contain inflationary pressure, those are not expected to hit economic growth adversely. According to CMD of a public sector bank, banks are borrowing somewhere between Rs 40,000 crore and Rs 50,000 crore from RBI every day at a rate of 8.5%.

He said if the central bank increases the cash reserve ratio (CRR) — the proportion of savings that a bank needs to keep with RBI — even by 0.25%, it will suck out over Rs 8,000 crore from the system, This will further increase the banks' dependence on RBI for short-term funds to meet their daily liabilities.

RBI has already increased CRR 13 times since December 2006 to reach 8.75% as on July 19, 2008. Since April 1, RBI has increased CRR by 1.25 percentage point leading to an evacuation of over Rs 47,500 crore from the system. Any further increase in CRR will affect credit availability to the industry. Meanwhile, the government has also expressed its concern over the availability of credit to the industry, which is essential to maintain the economic growth and create employment.

Despite banks increasing deposit rates, the mobilization has increased by only 3.5% as against 4.1% in April-June 2008 compared to the same period last year. This has also affected ability of banks to give credit to the industry. Demand for credit has grown substantially due to borrowings by oil companies. But, one banker said as lending rates have gone up in the last couple of months, borrowings for productive sectors have almost dried up. The growth in retail credit (home, auto and personal loans) is even worse.

A senior ICICI Bank official said retail credit growth of the bank in 2008-09 will be in the range of 5% only. Bankers also feel if RBI increases the repo rate, at which it lends short term funds to bank against government securities, the interest rate will further increase. Banks will have no option but to pass on the rate to borrowers. This will further slow down the growth.

However, DK Joshi, chief economist at Crisil, feels that RBI will increase both CRR and repo rate. He said RBI had earlier indicated that it will take harsh measures to contain inflation even if it affects the economic growth. With inflation around 12%, the Reserve Bank has no choice but to take steps to kill any further pricing pressure. In the current financial year so far, money supply stands at 20.5% as against RBI's projection of 17%.

Therefore, Joshi said, before inflation shoots up further, as it once happened in May and June, RBI would like to play safe and will increase CRR to tighten the money supply further.