Mumbai: The Reserve Bank of India is expected to hike short-term rates by 25 basis points to 6.25 percent this week with an aim to curb inflation that is 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.
“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.
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.
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.
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.
On the other hand,Indian bonds fell on speculation that RBI willincrease interest rates.
The yield on the benchmark 8.07 percent note due January 2017 rose 3 basis points, or 0.03 percentage point, to 7.9 percent as of 10:36 a.m. in Mumbai, according to the central bank’s trading system. The price, which moves inversely to the yield, fell 0.17, or 17 paise per 100 rupee face amount, to 101.15.
The 10-year bond yield may move closer to 8 percent in the coming days, an analyst said.
Bonds may pare losses on speculation higher yields will spur banks to buy debt to meet reserve requirements as their deposits rise. Under the nation’s banking law, lenders are required to invest at least 25 percent of their deposits in Indian government debt or other low-risk securities approved by the central bank.
“All the negatives are factored in at the moment, and we don’t see yields rising much beyond these levels,” said Rajesh Babu, a bond trader at state-owned Andhra Bank in Mumbai. “Yields should peak out at 8 percent and we may see some buying interest returning. State-owned banks may buy bonds as their deposits rise.”