RBI set to raise rates on surging inflation: Poll

An unexpected surge in inflation will likely spur the Reserve Bank of India (RBI) to raise interest rates for the third time in four months when it meets on Wednesday, a Reuters poll showed.

In a poll taken after data on Monday showed wholesale price inflation rocketed to a 14-month high in November, 39 out of 43 economists predicted the RBI would hike its repo rate to 8 per cent.

Indeed the spike in the headline WPI inflation rate to 7.52 per cent and the record high November consumer price inflation -driven by a sharp jump in the cost of food - have prompted many economists to revise their rate hike forecast and call for an increase in the repo rate on Wednesday.

If the RBI does increase the key rate that would be the third consecutive hike of 25 basis points and signal the growing difficulty Governor Raghuram Rajan faces in fighting stubborn food inflation at a time of slowing growth.


"Markets have now reconciled to the fact that the back of inflation has to be broken," said Sachichidanand Shukla, chief economist at Axis Capital in Mumbai.

"The rate hike (on December 18) is a done deal now looking at the momentum of both the wholesale and retail price inflation," he said.

For now, the consensus is for the central bank to pause rate hikes after December and hold the repo rate at 8 per cent at least until September 2014 after which it is seen cutting rates gradually.

The poll also showed 25 of 31 economists expect the RBI to raise the marginal standing facility rate-a key overnight lending rate-by 25 basis points to 9 per cent on Wednesday while leaving unchanged the cash reserve ratio at 4 percent.

The economy is stuck in a stage of low growth and rising prices-a situation some analysts define as stagflationary.

While economists said this year's favourable monsoon could soon provide some relief to food prices fiscal discipline by New Delhi and a jumpstart in investments is key to getting India out of the current impasse.

Finance Minister P. Chidambaram has pledged to limit the fiscal deficit to 4.8 per cent of gross domestic product in the fiscal year ending March 2014 in a bid to assure investors of the government's intent to clean up its finances and control inflation.

"Everyone is aware that rate hikes are not the only thing that can bring down inflation. We need better supply chain and fiscal management sanity," said Charanya Krishnan, economist at UTI Mutual Fund.

India is scheduled to go to elections in early 2014 and investors will be keen to see how the new government tackles the country's wide external deficit.

Rating agencies have repeatedly warned India's investment grade rating could be downgraded if steps were not taken to cut the fiscal and current account deficit.