Analysts see Rajan effecting third hike on December 18

Main concern for the central bank will be inflation, which may compel it to raise the policy rate again next week by 0.25%: HSBC

The latest retail inflation data which has hit a nine-month high, could force the Reserve Bank of India (RBI) to unleash another 0.25% hike in its short-term lending rate, though concerns persist on the growth front, according to analysts here.

"While growth is stabilising, it remains soft. However, the main concern for the central bank will be inflation, which may compel it to raise the policy rate again next week by 0.25%, to deliver on its hawkish promises and, through this, help anchor inflation expectations," said British brokerage HSBC.

It said this in a note issued by its Singapore office, a day after the government released November's consumer price inflation (CPI) numbers.

Its US peer Bank of America-Merill Lynch concurred, saying that a 0.25% hike on December 18, when RBI Governor Raghuram Rajan would release the mid-quarter review, is a "done deal", adding that along with the hike, the RBI could also seal the shift of the money market to the repo mode from the marginal standing facility (Marginal Standing Facility).

Banks depend on the repo window for their liquidity requirements and since borrowings under repo are capped, banks have to go to the MSF for additional fund requirements.

In a surprise move, the RBI had hiked the MSF by two pecentage points on July 15 to help the battered rupee to recover, due to which the MSF had become the operational rate.

Official data released yesterday was a mixed bag for the RBI vis-a-vis policymaking.

It said that consumer price inflation touched a nine- month high of 11.24% in November, while industrial production growth rate shrank by 1.8%, making it the first contraction in Index of Industrial Production (IIP) numbers in the last four months.

RBI Governor Rajan, who delivered two repo rate hikes of 0.25% in as many policy reviews since he took over on September 4, had mentioned that he considered fighting inflation as the central bank's "key responsibility".

Commenting on the latest inflation readings, the RBI Governor said in the capital yesterday, "I think monetary policy also has a role to play in trying to balance demand and supply. Again, as I said, we are aware of the weak economy but we also have to take into account inflationary pressure".

"Inflation has firmed and the fight against inflation is far from over," HSBC said.

BofA-ML said it expects headline inflation or inflation based on wholesale price index (WPI) in November (WPI data will be out on Monday) to inch up to 7.1%.

About contraction of industrial growth, BofA-ML said that this is due to unconventional actions by the RBI in July.

"The July tightening measures pushed back recovery to the September quarter by raising lending rates during the October-March busy credit season," it said.

Meanwhile, without stating its expectation on the policy move, the economic research department of the country's largest lender State Bank of India also expressed concern about data released yesterday, calling it a "double whammy".