India set to hike rates over inflation concerns

MUMBAI: India’s central bank is expected Thursday to hike interest rates for the eighth time in just over a year to clamp down on soaring inflation, which is the highest in any major Asian economy.Data earlier in the week showed annual inflation accelerated unexpectedly to 8.31 percent in February, from 8.23 percent the previous month, defying forecasts of a slowdown.”The question for this policy meeting is by how much the Reserve Bank of India will raise rates — not whether it will raise rates or not,” said HSBC chief Indian economist Leif Lybecker Eskesen.Some economists are pushing the RBI to adopt a robust stance and raise key short-term interest rates more than the expected 25 basis points.

“Inflation levels are scary. This is the right opportunity for the RBI to take an aggressive stance,” said Rupa Rege Nitsure, chief economist with state-run Bank of Baroda, who forecasts a 50 basis point hike.Across Asia, countries such as China, South Korea, Thailand and Vietnam have been tightening monetary policy to counter rising prices.India’s central bank has been the region’s most active in raising rates as the country climbs out of the financial downturn with growth projected at nine percent for the next fiscal year starting April 1.Inflation has been one of the biggest thorns in the side of the Congress-led government headed by Prime Minister Manmohan Singh whose coalition is also reeling from a slew of corruption scandals.While food inflation has fallen from peaks of 20 percent in early 2010, it remains stubbornly high at 9.50 percent, causing hardship and resentment among the general public as it erodes purchasing power.

Poorer households, the backbone of the Congress party’s support, have been hard hit by the rising cost of living.Inflation is a traditional lightning rod for political discontent in India, where three-quarters of the 1.2 billion population live on less then $2 a day, according to the World Bank.Economists now also say that inflation, initially fuelled by spiralling food prices, has spilt over into the general economy.”There is a new story for inflation,” said HDFC Bank chief economist Abheek Barua. “Inflation is no longer a play on food prices — it has somewhat rapidly become a more generalised phenomenon.”Recent figures from recruitment consultancy Aon Hewitt showed that Indian corporate salaries were set to grow by nearly 13 percent this year — the fastest pace in the world.The RBI has raised rates seven times since last March, pushing the repo — the rate on loans it makes to commercial banks — to 6.5 percent and the reverse repo — the rate it pays to banks for deposits — to 5.5 percent – Yahoonews