RBI expected to raise interest rates for 6th time this year

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The Reserve Bank of India is expected to raise interest rates for the sixth time this year on Tuesday to battle stubborn inflation that remains well above its comfort zone of 5-6 per cent.

Most economists expect theReserve Bank of India (RBI) to raise key rates by at least 25 basis points at its quarterly review on Nov. 2 and another quarter percentage point before the fiscal year ends in March.

The RBI’s key lending rate, or the repo rate, at the end of March 2011 is seen at 6.5 per cent, from 6 per cent now, while the reverse repo rate, or borrowing rate, is seen at 5.5 per cent, from 5 per cent now.

The RBI is expected to pause in its tightening cycle after the current fiscal yearends.

Central bank officials have been flagging their discomfort over persistent price pressures, but are expected to follow a slow-but-steady approach towards tightening policy. Deputy governor Subir Gokarn said on Tuesday that surging food prices were structural and will put upward pressure on interest rates.

Headline inflation was in the double-digits for six months through July. The annual wholesale price index for September, the last key data point before the central bank’s Nov. 2 review, rose 8.62 per cent compared with 8.5 per cent in August.

Annual food price inflation eased to 13.75 per cent in mid-October but remains high, in part because of rising demand as incomes increase.

The economy of the world’s second most populous country is on track to grow 8.5 per cent this fiscal year.

Market Impact: The market has largely factored in quarter point rate rises on Tuesday. The focus will be on clues in the RBI’s commentary on further policy action as well as its liquidity outlook.

If there is indication of a pause in tightening, then the benchmark bond yield may ease to around 8.04 per cent from around 8.11 per cent, but if the statement suggests continued worries about inflation, then it could rise to 8.20 per cent.