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India's central bank expected to raise interest rates

MUMBAI - India's central bank is expected to hike interest rates at its upcoming policy meeting as it battles to curb inflation hovering at a 13-year-high of nearly 12 percent, economists said Monday.

In recent months, the government has opted for a ‘safety first’ approach, with the Reserve bank of India choosing to aggressively tighten monetary policy despite the risk of slowing growth in Asia's third-largest economy.

The bank has this year already raised rates twice, and upped the Cash Reserve Ratio, or the amount of cash banks must hold in reserve, three times.

India's industrial production growth slid sharply to 3.8 percent in May -- its slowest pace in six years -- hit by rising inflation and monetary tightening.

Industrial growth was clocked at 10.6 percent in May last year.

But while India's economic engine has been losing steam, inflation holds centre stage. The rate is currently at 11.89 percent and far above the central bank's declared comfort level of five percent.

The fact that this rate was slightly down from an earlier reading ‘cannot be taken as the sign of inflation peaking out,’ said Siddhartha Sanyal, economist with brokerage Edelweiss Securities.

Analysts had forecast inflation to be at 12 percent.

‘We expect the RBI to hike the repo rate by 25 basis points to 8.75 percent and CRR also by 25 basis points to nine percent,’ he said.

The repo rate, currently at a six-year high of 8.50 percent, is the central bank's main inflation-fighting tool, through which it lends cash to banks and influences commercial borrowing costs.

Analysts at brokerage Sharekhan.com also expect a similar hike from the RBI when it meets Tuesday, warning inflation is likely to be in double digits for the coming months despite the successive rounds of monetary tightening.

In June, the RBI raised the repo rate to 8.5 percent from 8.0 percent.

It also announced a two-stage hike of the cash reserve ratio, by 25 basis points to 8.50 percent effective July 5, and by another 25 basis points to 8.75 percent on July 19.

‘I don't think inflation is coming off that easily... we expect it to rise above 12 percent by next Friday,’ said Rupa Rege Nitsure, senior economist with Bank of Baroda.

Crude oil prices will continue to be a concern, despite a decline in recent weeks.

‘There have been positive developments in crude oil prices but its sustainability remains unclear. Crude price levels themselves remain disturbing,’ said Shuchita Mehta, senior economist with Standard Chartered Bank.

Inflation will remain in double digits even if commodity prices remain unchanged until the end of the year, Standard Chartered's calculations show.