Tighter interest rates expected in 2011: Assocham

Cash crunch in the system, coupled with high inflation, will keep interest rates at higher levels in 2011, warns industry body Assocham.

With inflation likely to rise further, the Reserve Bank may go in for an another hike in the key policy rates in its fourth quarterly Review, slated to be announced on January 25.

Inflationary pressures are building up with commodity prices shooting up the world over as well as crude touching $90 per barrel, the chamber said.

High inflation would put pressure on RBI to go in for tighter monetary policy -- hiking rates at which it lends to and borrows from other banks -- which, in turn, helps curbing consumer spending and taming the rate of price rise.

Inflation continues to be much higher than the tolerance level of 5.5 per cent per annum, as projected for the end of the current fiscal.

Both, food as well as overall inflation have been much higher than this level for most of this year.

Food inflation surged back into the double-digit territory at 12.13 per cent for the week ended December 11 as the prices of vegetables, particularly onions, rose for the third consecutive week.

Meanwhile, although overall inflation for November was at 7.48 per cent, down from 8.58 per cent in the previous month there are concerns that it may rise again.

"The days ahead are extremely dicey. . . The options with RBI are limited as the growth is not likely to be sacrificed for inflation. Hence there is every likelihood of policy rates to inch up in the next monitory policy," Assocham president Dilip Modi said.

The chamber also said that faster credit growth has put pressure on the liquidity and the crunch is likely to remain in 2011 because high inflation has dissuaded investors to park funds with banks, as reflected in low deposit growth. RBI has blamed, partially, the sluggish growth in bank deposits for aggravating the shortage in money supply.

This could partly be attributed to negative returns these deposits fetch for people, compared to inflation rate. However, it said that the recent mid-quarter monetary policy of the RBI has supported the liquidity market which would sustain growth in credit off-take.