The Reserve Bank of India (RBI), during its mid-quarter policy review on Thursday, is expected to raise key policy rates — the repo and the reverse repo — by 25-basis-points (bps).
The repo rate is the rate at which the central bank lends to banks while the reverse repo is the rate at which RBI absorbs liquidity from banks against government securities.
The RBI, which raised its main lending rate by 100 basis points since mid-March, seems to be aiming for another hike of 50 basis points in policy rates by the end of 2010 to ease inflationary expectations. The benchmark rates, which now stand at 5.75 percent and 4.50 percent respectively, are still far below historic highs.
However, the country’s booming stock market is widely expected to shrug off the spat and push ahead as factories brim with activity to feed robust festive demand in the coming two months.
Industrial output rose 13.8 percent in July from a year earlier, nearly double analysts’ forecast of a 7.7 percent rise and the fastest growth since April. It was also higher than June’s downwardly revised 5.76 percent growth, according to government data.
Production of capital goods such as machinery in Asia’s third-largest economy soared a massive 63 percent, while output of consumer durables such as washing machines climbed 22 percent, it added.
Though India has been the most aggressive country in the Asia-Pacific region in raising rates to check prices, its inflation remains among the highest among the leading Group of 20 economic powers, at nearly 10 percent.
“Inflation is a concern. I am concerned that prices are increasing,” said India’s finance minister Pranab Mukherjee. “RBI will take appropriate measures as and when needed. But at the same time, I cannot go on a reverse growth path.”
Mukherjee said India would likely grow between 8.5-8.75 percent in the fiscal year ending next March, therefore possibly exceeding earlier growth estimates of 8.5 percent.
August’s headline inflation is forecast to have eased to 9.6 percent, which would be its second-consecutive month below double digits. Yet with food inflation accelerating for three straight weeks and signs of manufacturing capacity constraints, policymakers fear high food prices could spill over into the broader economy.
Regarding rates, economists had expected the central bank might hit the pause button on its increase when policymakers meet this Thursday, to buy time to assess the strength of India’s recovery from the global financial crisis.
