RBI rate rise expectations grow on inflation worries

RBI rate rise expectations grow on inflation worries

Mumbai: The Reserve Bank of India is seen raising rates by a quarter point on 3 May and analysts now expect it to raise rates by a total of 75 basis points for the rest of 2011, or 25 bps more than they expected in mid-March, a new Reuters poll found.

Headline inflation in Asia’s third-largest economy surged to nearly 9% in March, far above forecasts, on higher fuel and manufacturing prices, adding pressure on the RBI to take bolder action despite eight rate rises since March 2010.

More than half of respondents, or 10 out of 19, said the RBI should be more aggressive in its policy response, compared to just one respondent in a mid-March poll.

“Inflation is a politically sensitive issue and RBI is facing a lot of criticism on that front, so I think they will continue to raise rates, but 25 basis points looks more likely going by their calibrated approach so far," said Rupa Rege Nitsure, chief economist at Bank of Baroda.

The central bank has preferred quarter-point rate rises during its current tightening cycle.

“I don’t think there is any danger to growth because of rate hikes. Sustaining chronic inflation poses a more serious threat to growth than raising rates," Nitsure said.

However, industrial output growth slowed unexpectedly in February, adding to evidence that India’s economic expansion may be moderating.

The strong pace of growth in India’s manufacturing sector steadied in March, helped by sustained new orders and output, while input prices were at their highest in at least six years, signalling further inflationary pressures, a survey showed on Friday.

The RBI’s key lending rate, the repo rate, currently at 6.75%, is seen rising to 7% on 3 May and to 7.5% by the end of 2011, the poll found. According to the last poll in mid-March, the rate was seen at 7.25% at year-end.

The reverse repo rate, or borrowing rate, which stands at 5.75%, is seen rising to 6% on 3 May and to 6.50% by the end of December.

The central bank has so far raised its key lending rate by a total of 200 basis point since mid-March last year.

India’s economy is expected to have grown 8.6% in the fiscal year that ended in March, while the government expects it to grow at about 9% in the current fiscal year. However, many private forecasters expect growth to slow in the current fiscal year.