- POSTED: 18 Dec 2013 06:59
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India's central bank was expected to hike interest rates for the third time in four months on Wednesday after a sharp spike in inflation.
MUMBAI: India's central bank was expected to hike interest rates for the third time in four months on Wednesday after a sharp spike in inflation.
Wholesale inflation jumped to a 14-month-high of 7.52 per cent in November, while rising food costs also pushed up consumer price inflation (CPI) to a higher-than-expected 11.24 per cent.
Analysts say the Reserve Bank of India (RBI) is likely to increase the key repo rate, at which it lends to commercial banks, by 25 basis points to 8.0 per cent, its highest level since April 2012.
The bank is holding its mid-quarterly policy meeting in Mumbai and is expected to announce its decision at 11:00 am (0530 GMT).
It had raised rates both in September and October under new governor Raghuram Rajan, who has signalled his intention to fight inflation which has stood above the bank's comfort levels for years.
The government and business leaders are however keen that the RBI starts to lower interest rates to help spur economic growth, after it slumped to decade-lows.
Rajan last week said the bank was "very uncomfortable" with the inflation level but added that growth was also "weaker than we would like".
Economist Sonal Varma of Nomura Financial Advisory and Securities said she expected a 25 basis points rise.
"The spike in CPI inflation and rising momentum in core inflation suggest an imminent rate hike," she told AFP.
Sunil Kumar Sinha of India Ratings, a Fitch group firm, expected a similar decision with inflation "still at elevated levels".
But Barclays Capital's Siddhartha Sanyal warned that such a move may not help to control inflation, which has been led by higher vegetable prices.
"We think it is difficult for the RBI to achieve this in the near term when higher inflation is being driven by food prices and not by demand overheating," he said.
Anecdotal evidence suggests that vegetable prices have started to normalise, Sanyal said, but is yet to be reflected in official statistics. He called for rates to remain unchanged on Wednesday.
India posted a surprisingly strong economic growth of 4.8 per cent in the second quarter ended September, data showed last month, on the back of robust farm output.
Finance Minister P. Chidambaram expects India to expand by five per cent again this year, but various economists see growth in the four per cent range.
Chidambaram last week said taming inflation was the government's top priority, adding that it was "common knowledge the government of the day will pay a high price for inflation".
The scandal-scarred Congress government hopes for a revival in the economy ahead of elections in May, after faring poorly in state polls.