India set for 12th rate hike to control inflation

MUMBAI: India's central bank was expected to hike interest rates on Friday for the 12th time since March last year, as it opts to fight spiralling inflation despite a slowdown in the economy.

Economists forecast that policymakers at the Reserve Bank of India (RBI) would raise short-term interest rates by 25 basis points when they announce a decision in financial capital Mumbai at 12:00 pm (0630 GMT).

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 over-a-decade 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.

HSBC India chief economist Leif Lybecker Eskesen said the bank was likely to retain its tightening bias as inflation is not coming off its highs.

"With this backdrop, the RBI should still consider inflation a dominant concern and notch up rates by 25 basis points (on Friday)," he said.

The government and business leaders, however, hope the hawkish central bank may pause soon in raising interest rates as economic growth slows due to the relentless tightening.

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

But hours after he made the statement, the Press Trust of India reported state-owned oil firms would hike petrol prices by three rupees (six cents) a litre, the fifth rise this year, to offset high international crude prices.

Business groups are complaining that the rate hikes are choking economic growth, 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, as expansion was hit by the longest stretch of monetary tightening in a decade.

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.

Experts hope that inflation and high commodity prices could ease in coming months as global growth concerns intensify and domestic demand moderates.

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