India's central bank is expected to raise its key lending rate by 25 or 50 basis at its policy review next Tuesday to cool inflation from near 12 per cent, and further rises are also expected, a Reuters poll showed.
Seven out of 11 analysts polled expected the Reserve Bank of India (RBI) to raise the repo rate from 8.50 per cent on July 29, to follow on from its policy tightenings in June after inflation had surged into double digits.
"Most of the recent rise in inflation has been due to rising manufactured products inflation, which suggests that risk of second-round effects remains," said Sonal Varma, an economist at Lehman Brothers.
"This includes producers passing on input costs to consumer by hiking output prices and workers demanding higher wages."
"For the RBI, anchoring inflation expectations to counter such second-round effects is critical," Varma said.
Five of the seven economists expecting a rate rise next week also expected another rise of up to 50 basis points before the end of the fiscal year next March. Two of the four forecasting steady rates next week expected a rate rise later in 2008/09.
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 (CRR) to 8.75 per cent.
Only four of the 11 economists polled expected the CRR, the per centage of deposits banks have to park with the central bank, to be raised next week. But nine, including those four, expected an increase before the fiscal year ended.
"The focus of the policy now will be in controlling excess money supply," said Abheek Barua, chief economist at HDFC Bank.
"Despite fairly tight liquidity conditions, perhaps they will go ahead and hike CRR again in anticipation of pick-up in flows on the back of (Tuesday's) resolution," Barua said.
The Congress-party led coalition won a confidence vote in parliament on Tuesday after the Communists had withdrawn their support in protest against a civilian nuclear deal with the United States.
M3 money supply grew an annual 20.5 per cent in early July, way above the central bank's aim of 16.5-17.0 per cent for 2008/09.
None of the analysts expected any change to the reverse repo rate, at which the central bank absorbs excess funds from the money market. It stands at 6.0 per cent, unchanged since July 2006. finexp-
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