The Reserve Bank of India (RBI) will consider tomorrow whether to raise interest rates for a fifth time this year as strengthening growth threatens to reverse gains made in reining in inflation.
Governor Duvvuri Subbarao will boost the benchmark repurchase rate by a quarter-point to six per cent, according to 11 of 16 economists surveyed by Bloomberg News, with five seeing no change. Thirteen expect an increase of that much or more in the reverse repurchase rate by RBI.
Subbarao is under pressure after millions of workers went on strike over the hit to spending power from inflation, which at 8.5 per cent in August remained among the world's highest even as it eased for a fourth month. A rate move would contrast with pauses by Malaysia and South Korea this month amid concern the global recovery is slowing, and with signals in the interest- rate swaps market of the approach of an end to increases.
"Inflation is a much, much bigger problem in India than in any other country in the region," said Frederic Neumann, co-head of Asian economic research in Hong Kong at HSBC Holdings. "RBI should worry about the local factors rather than the global factors over which it has little control."
Economic reports in the past week indicated both a pick-up in growth and moderation in prices. Industrial production expanded 13.8 per cent in July from a year earlier, more than twice the pace in June, a report showed last week. Maruti Suzuki India, the nation's biggest carmaker, sold a record 104,791 vehicles last month, and India's merchandise exports increased 22.5 per cent from a year earlier to $16.6 billion in August, Commerce Secretary Rahul Khullar said today.
Bonds, rupee
The Reserve Bank is scheduled to announce its interest-rate decision at noon in Mumbai tomorrow. Wholesale prices rose 8.5 per cent in August from a year earlier after July's 9.8 per cent gain, the commerce ministry said yesterday. The yield on the benchmark 10-year government bond fell 1 basis point to 7.93 per cent at 2:20 pm in Mumbai today. The rupee climbed as much as 0.2 per cent as a stock rally spurred optimism foreign investors will boost buying. Prime Minister Manmohan Singh's government has signaled increased acceptance of higher borrowing costs amid public protests over inflation, which most affects the three quarters of the population who live on less than $2 a day.
Interest rate swaps
At the same time, one gauge of the outlook for rates suggests Subbarao may be approaching the end of the series of increases. The cost of fixing rates on money for three years in the market for so-called interest-rate swaps tumbled 37 basis points in August, the most in 20 months.
Nomura Holdings, Japan's biggest brokerage, forecasts an increase of 0.25 percentage point this week that will be the last in the year through March.
The government was consulting the central bank to take "appropriate measures at the appropriate time" to control inflation, Finance Minister Pranab Mukherjee said yesterday in New Delhi.
