India set for 11th rate hike to control inflation

MUMBAI: India's central bank is expected to hike interest rates for the 11th time in less than a year and a half on Tuesday as it opts to continue to fight inflation despite warnings from business leaders.

Economists forecast that policy makers at the Reserve Bank of India (RBI) will raise short-term interest rates by 25 basis points when they announce a decision in the financial capital Mumbai at 11:00am (0530 GMT).

The benchmark repurchase or repo rate, at which the RBI lends to commercial banks, is currently at 7.50 percent while the reverse repo, paid to banks for deposits, is 6.5 percent.

The repo is now at its highest since November 2008 while the reverse repo is at a peak not seen for more than five years.

Another interest rate rise is seen as almost inevitable given that inflation was at 9.44 percent in June -- the highest for any large economy except Russia -- and well above the RBI's preferred level of 5.0-6.0 percent.

The benchmark 30-share Sensex on the Bombay Stock Exchange was largely flat in opening trade before the announcement, up 28.02 points or 0.15 percent at 18,899.31.

"The RBI is likely to stay focused on fighting both inflation and elevated inflation expectations," said Siddartha Sanyal, chief India economist with Barclays Capital, in a note to clients.

"Inflation is still hovering near double-digits and is likely to move further up in the coming months."

Shanu Goel, a senior research analyst with brokerage Bonanza Portfolio Limited, said the RBI was "left with little choice", as policy measures so far had failed to unwind inflationary pressures.

"Most of the business houses have already begun to complain about the high cost of funds eating out their margins but current economic situation warrants another rate hike," she added.

In June, business leaders rounded on the government, urging a halt to the rises.

The president of the Associated Chambers of Commerce and Industry of India, Dilip Modi, warned that high input prices, rising finance costs and global uncertainties are adding to negative sentiments".

"A high interest rate environment will most certainly put brakes on new investments," he added.

But the RBI is on its longest streak of monetary tightening in a decade and is on record as saying that short-term growth may have to be sacrificed to fight inflation running at "uncomfortable" levels.

Rate hikes "are pinching" but the spike in inflation is being perceived as more serious than any potential growth slowdown at the moment, said Barclays Capital's Sanyal.

The central bank policy meeting comes after the government this month cut its growth forecast from 9.0 percent to 8.6 percent for the current fiscal year, due to a "perceptible slowdown" in the past two financial quarters.

A rash of interest rate rises has slowed consumer demand and India's annual industrial output growth decelerated in May to 5.6 percent, its weakest pace in nine months, down from 8.5 percent expansion in the same month a year ago.

The surge in inflation was initially triggered by spiralling food prices and then exacerbated by rising global commodity prices and higher fuel costs.

Inflation has now spilled over into the general economy, pushing up wages and other costs.

The RBI will have to factor the impact of recent fuel price rises, which economists say will be felt next month.

Last month, RBI deputy governor Subir Gokarn said that inflation would remain high until October -- the start of the third quarter of India's financial year -- but the effect of the rate rises would begin to be seen after that.

Rate hikes would only be halted when non-food manufacturing inflation begins to stabilise, he added.

Copyright AFP (Agence France-Presse), 2011