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India braced for another rate hike

13 june 2011, 13:25
Photo courtesy of www.indian-commodity.com.
Photo courtesy of www.indian-commodity.com.
Indian policy makers look set this week to hike interest rates for the 10th time in just 16 months, even as the pace of economic activity shows signs of easing, AFP reports.

Inflation is currently running at more than 8.5 percent -- the highest of any large Asian economy -- and bringing down the cost of living has become the main priority for the country's central bank, the Reserve Bank of India (RBI).

Analysts expect the RBI to raise rates by 25 basis points at its mid-quarter monetary policy meeting in the financial capital Mumbai on Thursday.

"The RBI will take a calibrated approach, with a 25 basis points hike," said Rupa Rege Nitsure, chief economist with state-run Bank of Baroda.

"It will step off only when inflation shows signs of easing."

RBI governor Duvvuri Subbarao believes that the current inflation rate is too high.

At 8.66 percent in April, the wholesale price index -- the government's preferred measure of the cost of living -- is well above the bank's target of five to six percent.

The benchmark repurchase, or repo rate, at which the bank lends to commercial banks, is 7.25 percent while the reverse repo, paid to banks for deposits, is 6.25 percent.

Subbarao has said he is prepared to act to tame inflation even at the expense of short-term growth.

Analysts say relentless monetary policy action by the RBI has started to impact previously "overheated" sectors of the economy, such as automobiles, consumer durables and construction, where growth is easing.

But the bank is unlikely to step off the accelerator yet until inflation starts to slow, they added.

"For now, persistently high inflation rather than the moderation in growth will be the RBI's focus," said Sonal Varma, India economist at Nomura Securities.

"Inflation is very sticky and nagging," added Siddhartha Sanyal, chief India economist with Barclays Capital.

Annual inflation data for May is due out on Tuesday and a level higher than April's figure will place pressure on the RBI to raise rates further.

Economists expect the figures to be at nearly nine percent, particularly after food price rises climbed to 9.01 percent in the week to May 28.

India's Congress-led government has delayed a decision to hike prices of diesel and kerosene, which is widely used in rural areas and is seen as the "poor man's fuel".

It is under pressure after a spate of corruption scandals and is facing claims of being "anti-poor" for its inability to lower the cost of living, which has hit the country's lowest-earners hardest.

Analysts say a hike in the cost of diesel would further stoke inflation because of its use in the transport of goods around the country.

"The still-elevated inflation will worsen in the next few months due to the anticipated upward revision in local fuel prices," said Rajeev Malik, senior economist with CLSA in Singapore.

Asian economies from South Korea, Indonesia and Taiwan to China are all battling inflationary pressures.

A recent World Bank report warned that India's economic growth could moderate to eight percent in the current financial year to the end of March 2012, due to rising inflation and slowing demand.

India's finance minister, Pranab Mukherjee, estimates the economy will grow at 8.75 percent in 2011-12.

The Indian economy grew by 8.5 percent in 2010-11, up from 7.4 percent in 2009-10.

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