India set for another rate hike to fight inflation

MUMBAI: India's central bank was expected to hike interest rates on Friday for the 12th time since March last year, keeping up its battle against spiralling inflation despite a slowdown in the economy.

Economists forecast that policymakers at the Reserve Bank of India (RBI) would raise short-term rates by 25 basis points in a policy announcement scheduled for 12:00 pm (0630 GMT) in Mumbai.

The benchmark repurchase or repo rate, at which the RBI lends to commercial banks, is currently at 8.0 percent, its highest level in nearly three years, while the reverse repo -- paid to banks for deposits -- is at an more than 10-year high of 7.0 percent.

Another interest rate rise is seen as almost inevitable after inflation in August came in at 9.78 percent -- a 13-month peak, the highest for any large economy, and almost double the RBI's comfort level of 5.0 percent.

"It appears premature for the RBI to step off the gas at this stage," Shubhada Rao, chief economist at private sector Yes Bank, told AFP.

"Inflationary pressures are waning but are still elevated," she added.

The latest inflation data were fuelled by price rises in food, fuel and manufactured goods.

State-owned energy firms on Thursday hiked petrol prices by five percent to stem losses from high crude prices, leading to condemnation from opposition parties and long queues at petrol stations.

That helped the Oil and Natural Gas Corporation, which saw its share price shoot up more than 6.5 percent in early trade on the Bombay Stock Exchange Friday, pulling the benchmark Sensex up by about 1.0 percent on opening.

"With this backdrop, the RBI should still consider inflation a dominant concern and notch up rates by 25 basis points," said HSBC India chief economist Leif Lybecker Eskesen.

Government and business leaders, however, are concerned at the cumulative impact of the repeated rate hikes on the economy, with industrial output growing just 3.3 percent year-on-year in July -- its slowest in nearly two years.

Last month, India posted its slowest gross domestic product (GDP) growth in six quarters, up 7.7 percent year-on-year.

Finance Minister Pranab Mukherjee said on Thursday that inflation may now have peaked and "we should see a gradual moderation in monthly headline inflation".

A further rate hike -- after an unexpected 50 basis points rise in July -- means the cost of borrowing will increase and auto and property loans get costlier, impacting demand for goods and some services.

The government expects the economy to grow by around 8.5 percent while the central bank has forecast near eight percent growth for the fiscal year to March 2012.

The RBI expects inflation to moderate to 7.0 percent by March.

Copyright AFP (Agence France-Presse), 2011