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central-bank-of-indiaNEW DELHI: India's central bank is set to raise interest rates for the 13th consecutive time this week in a bid to tame near double-digit inflation, even as "dark clouds" gather over Asia's third-largest economy.

The Reserve Bank of India has increased interest rates 12 times since March 2010 -- the most aggressive tightening pace of any central bank globally -- and analysts expect policymakers to hike them again at a scheduled meeting Tuesday.

India's economy has slowed under the brunt of the dozen rate rises which have driven up borrowing costs and dampened demand, while a faltering US recovery and the eurozone debt crisis have cast a further pall.

But prospects of a 13th rate hike by the bank looked sealed as India's food inflation crossed into double digits.

It jumped by more than a percentage point in a week to hit a year-on-year figure of 10.6 percent on Thursday, driven by soaring vegetable prices. Headline inflation stands at 9.72 percent.

"Another rate hike looks likely in view of persistently high inflation," Crisil ratings agency chief economist D.K. Joshi said.

"The downside risks to growth are rising but inflation is offering no comfort" to the bank, which has consistently said it is willing to sacrifice growth to curb prices, Joshi told AFP.

The ruling Congress-led coalition, which is reeling under the impact of a slew of corruption scandals, desperately wants to keep the cost of living down, fearing a voter backlash in key state elections next year.

Finance Minister Pranab Mukherjee insisted last week that India's economic fundamentals were still strong, but added: "Dark clouds have gathered in the global scenario, casting a shadow on us."

The government now projects expansion of "close to eight percent" in the financial year to March 2012, down from an initial nine percent forecast, after the economy grew by 8.5 percent last year.

But investment houses are more pessimistic, with Goldman Sachs forecasting growth of just seven percent.

Such numbers are robust by Western standards, but too slow to fulfil government pledges of significant poverty reduction and to create enough jobs for a soaring young workforce in the country of 1.2 billion.

Growth of seven percent would also play havoc with Mukherjee's budget.

Economists say India's public finances are deteriorating with a rising subsidy bill, lower-than-expected tax revenues and privatisation earnings, and mounting public borrowings.

The government has been forced to postpone big-ticket sales of stakes in state-owned companies due to unfavourable market conditions that have seen the Indian stock market fall about 20 percent since the beginning of this year.

The government's top financial advisor C. Rangarajan said Friday it would be a "Herculean task" to cut the budget deficit -- the gap between a government revenues and spending -- to a targeted 4.6 percent of Gross Domestic Product.

Economists forecast the deficit will rise.

"The government under-budgeted on subsidies, oil and fertilisers in particular, and was too optimistic on revenues and privatisation receipts," said Goldman Sachs' Tushar Poddar, who predicts the deficit at 5.8 percent.

Many central banks in Asia have shifted focus from fighting inflation to promoting growth as global financial turmoil begins to curb economic expansion. But Mukherjee says each country must pursue its own monetary policy.

"I do not buy the argument that because certain central banks have adopted certain policies, we have to follow," he said.

Adding to the general gloom is perceived paralysis in the government, which has postponed major economic reforms as it fights the numerous corruption scandals that have damaged the reputation of Prime Minister Manmohan Singh.

Top businessmen, economists and judges warned this month that the country's prospects are being "vitiated by corruption in almost every sphere".

The weakening of India's economy comes as regional rival China reported last week quarterly growth slowing to 9.1 percent, its weakest pace in over two years, hit by monetary tightening to curb inflation and global headwinds.

Copyright AFP (Agence France-Presse), 2011


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