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 another hike in the key policy rates in its fourth quarterly review, slated to be announced on January 25.

The chamber said that inflationary pressures are building up with commodity prices shooting up the world over as well as crude touching USD 90 per barrel. 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 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% 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%, down from 8.58% in the previous month there are concerns that it may rise again.

Mr Dilip Modi president of ASSOCHAM said that "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.”

(Sourced from ET)