The Reserve Bank of India (RBI) resumed its rate hike cycle at its quarterly monetary policy review on Tuesday as soaring inflation stalks Asia's third-largest economy. RBI raised repo and reverse repo rates by 25 basis points each. Repo rate, the one at which RBI lends to banks will now be 6.50%, reverse repo, the rate banks receive for depositing funds with the central bank will be at 5.50%. Cash reserve ratio, the proportion of deposits that banks have to keep aside, was left untouched at 6%. RBI also raised March inflation forecast to 7% from 5.5% and warned that higher food prices could become entrenched if steps to boost output are not taken. The central bank maintained that India's GDP will grow at 8.5% for FY-2011. The wholesale price index (WPI) , India's main inflation gauge, is expected to rise by an average 8.8 percent for the fiscal year ending March 2011 before easing to 6.4 percent in the following year. This is considerably higher than 8.3 and 5.7 percent forecast in the October survey. Driven by costlier food items, wholesale price inflation soared to an annual 8.43 percent in December, compared with an expected 8.35 percent and above the previous reading of 7.48 percent. Many economists now believe the Reserve Bank of India (RBI) will be forced to undertake much swifter policy tightening than was previously foreseen. Price growth would remain above the RBI's comfort levels, according to the latest poll, averaging 7.7 percent in the quarter ending March before easing to 5.5 percent in the second half of 2012 -- a level the central bank had hoped to reach by March this year. Fiscal consolidation in the midst of the government at this point looking alright but that is for the most part on account of convinced one off repayment that the government has got by way of the spectrum auctions and disinvestment proceeds but saying clearly that that is not the approach to go frontward for the government. Again declining of the issue of subsidies that are being extended by the government which it says at some level delays the development of transmitting real prices down to the economy, efficiently creating non-natural demand at the end merely by lowering prices and captivating that cost onto its books. Also saying that the current account deficit at the 3.5% levels is unsustainable, also pointing to the fact that if until now capital inflows into India have some way helps address the current account deficit. We believe the Reserve Bank will increase rates from 6.25 percent now to 7.25% by end-September this year. The RBI, seen as Asia's most aggressive major central bank after it increased rates six consecutive times last year. While rampant inflation will be the RBI's primary concern, it will also be mindful of a slowdown in growth -- mainly in industrial output which slumped to an 18-month low of 2.7 percent rise in November from the 11.3 percent increase seen a month earlier. The Indian economy is still set to grow at the same robust pace seen over the last fiscal year, averaging 8.7 percent in the year-ending March 2011, before moderating slightly to 8.5 percent in the following year.
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