The Reserve Bank of India has raised interest rates 11 times in 18 months but inflation remains at more than twice its comfort level, putting it in the awkward position of fighting high prices amid mounting worries about the health of the global economy.
The wholesale price index, India's main inflation gauge, rose 9.78 percent in August, higher than the median forecast for a 9.6 percent rise in a Reuters poll and above the 9.22 percent recorded for July.
"Clearly, inflation is not easing as expected by the RBI despite its aggressive monetary stance, and some more time may be needed for the past policy actions to show effect," said Arun Singh, senior economist at Dun & Bradstreet, who expects a 25 basis point rate hike on Friday and another thereafter.
While July industrial output data on Monday was the worst in nearly two years, adding to the argument against a rate increase, the central bank is still expected to raise rates by another 25 basis points at its mid-quarter review on Friday to combat inflation.
"This does clearly boost scope for the RBI to tighten policy rates by 25 basis points on Friday, though the trajectory thereon could hinge on intermittent inflation outlook, non-manufacturing WPI in particular," said Radhika Rao, economist at Forecast PTE in Singapore.
India's June-quarter growth of 7.7 percent was the weakest in six quarters, and RBI Governor Duvvuri Subbarao has been under increasing pressure from officials in New Delhi to bring the current tightening cycle to a close.
Manufacturing inflation quickened to 7.79 percent in August from 7.49 percent in the previous month and its highest in three years, indicating that manufacturers still retain pricing power, although stalling domestic car sales show demand is slipping as rates rise.
Global and domestic economic conditions and sentiment have deteriorated markedly since Subbarao stunned investors in July with a 50 basis point rate increase, twice what was forecast.
Copyright Reuters, 2011