The Reserve Bank of India (RBI) will likely raise key lending rates, in an attempt to tackle rising inflation, at its quarterly monetary policy review on July 29.

India’s inflation — wholesale price index (WPI) stood at 11.89 percent for the week ended July 12 — is more than double the central bank’s comfort zone of 4.5 percent to 5.0 percent.

Lehman Brothers said, in a research note, the policy options to lower inflation are limited because of fiscal deterioration, making it harder for the central bank to use supply-side policy tools.

Also, a widening current account deficit could limit the use of currency appreciation to combat inflation.

Lehman Brothers expects the RBI to raise repo rates by 25 basis points in July and the cash reserve ratio by 50 basis points in third-quarter 2008, but does not rule out a more aggressive 50-basis-point repo rate hike from the central bank.

Since April 2008, the RBI has hiked cash reserve ratio by 125 basis points, which absorbed about 470 billion rupees from the system. In June, the central bank raised the repo rate by 75 basis points in two steps and announced a 50 basis point increase in the cash reserve ratio to 8.75 percent.

“The inflation rate of 11.9 percent for a country which enjoyed 3 to 4 percent inflation as recently as second half 2007, is no cause for complacency and we do not think that the data will be a source of comfort for the RBI when it decides on monetary policy and we expect further tightening measures,” Dresdner Kleinwort Securities said in a report.

“We expect monetary policy to remain tight in 2008, but start easing in 2009. We expect the RBI to raise the repo rate and CRR by 25 basis points each at its policy meeting. We are expecting another 25 basis points on the repo and CRR respectively, by end-October,” said Tushar Poddar, vice president, Asia Economic Research, Goldman Sachs.

Goldman Sachs also raised India’s inflation forecast for fiscal year 2009 to 11.5 percent from 10 percent and for fiscal year 2010 to 5.3 percent from 4.7 percent.

Mumbai brokerage Edelweiss Capital in a note said it did not expect year-on-year WPI inflation to soften below the double-digit mark anytime in 2008. Edelweiss also noted the finance ministry’s expectations that inflation may cross the 13 percent mark in the near term and may not come down below 10 percent before Dec.

Edelweiss also said it expects the RBI to hike repo rate by 25 basis points to 8.75 percent and cash reserve ratio to 9.0 percent while keeping the reverse repo rate unchanged at 6.0 percent.

IDBI Gilts Ltd., a unit of IDBI Ltd., expects the RBI to increase its repo rate by 25 basis points to 8.75 percent and hike the cash reserve ratio by 25 basis points to 9.00 percent and does not foresee any change in the reverse repo rate and the bank rate, which currently stand at 6.00 percent each.

Industry body Associated Chambers of Commerce and Industry of India has urged the central bank to maintain status quo in existing cash reserve ratio and repo rate as it feels an increase in rates would further raise cost of borrowing for Indian industry.

IDBI Gilts said if the RBI chooses to increase its inflation target for fiscal year 2008-09 at the upcoming review, the market would take it as a positive signal implying that the central bank has recognised the year as being exceptional for price rise and hence, possibility of further considerable tightening in rates would diminish.

Source: http://www.afxnews.com

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