MUMBAI (AFP) – The Reserve Bank of India is expected to hike short-term rates by 25 basis points to 6.25 percent in a review this week with inflation near a two-year high, analysts said.
Wholesale inflation — the most closely watched price index — stood at 5.95 percent for the week ended January 13.
Prices are now well above the annual rise of 5.0 to 5.5 percent expected by the central bank for the year ended March, and will prompt it to stem the rise in a monetary policy review on January 31, analysts said.
“We expect this trend to continue. The RBI will increase the repo and reverse repo rates by 25 basis points,” said Rajeev Malik, Asia economist with JPMorgan Chase Bank based in Singapore, in reference to the central bank’s key overnight borrowing and lending rates.
India’s economy grew by 9.1 percent in the fiscal first half ended September, while credit growth has been expanding by over 30 percent annually, which led the central bank to warn in its last review in October of signs of “overheating.”
In the October review, the RBI raised the repurchase rate by a quarter percentage point, or 25 basis points, to 7.25 percent and kept its reverse repurchase rate at a four-year high of 6.0 percent.
But despite government efforts to lower prices by cutting import duties on items like wheat, wholesale food prices have gained more than nine percent in the past year as farm output fell short of targets.
The rise in food prices has become a sensitive political topic in the country where almost two-thirds of the population live near or below the poverty line of two dollars a day.
This month, Finance Minister P. Chidambaram said the inflation numbers were “a matter of concern” and his ministry was in touch with the Reserve Bank and the agriculture ministry to control the price without damaging the fast pace of growth.
“The government has found that items of daily use by the common man … are causing concern,” he told reporters. “We will watch the situation carefully and take whatever steps require to be taken.”
Analysts said Chidambaram’s comments were a clear signal interest rates would rise in the latest central bank review.
“I see the reverse repo going up by 25 basis points,” said D.K. Joshi, principle economist at Indian credit rating agency Crisil.
Analysts note that the Congress party-led government that came to power in May 2004 has repeatedly said “price stability is one of the highest priorities.”
“Inflation is a highly sensitive issue for the government,” said T.K. Bhaumik, chief economist at India’s largest private company, Reliance Industries.
Since it began its tightening cycle began in late 2004, the central bank has been using a variety of tools to fight inflation.
In December, it boosted the amount of money that banks must keep with the central bank, raising the cash reserve ratio by 50 basis points to 5.5 percent in a bid to suck out liquidity and tame credit growth.
But India’s economy has still managed healthy growth and its benchmark share index, the 30-share Mumbai stock exchange Sensex hit a record high close high of 14,217.75 on January 18.