India set to hike rates again to check inflation

India's central bank is expected to raise interest rates on Tuesday - the fourth time this year - in an attempt to tame the highest inflation among the leading Group of 20 economic powers.
 
India's annual wholesale price index, the main cost-of-living measure, was riding at 10.55 percent in June, well above the Reserve Bank of India's preferred 5.5 percent level, which it expects to touch by March next year.
 
The central bank has hiked rates three times this year but inflation remains stubbornly high - in double digits for five straight months - driven by surging wages, a rebounding economy and low farm output.
 
The cost of food has been rising after farm output was hit by the country's weakest monsoon in nearly four decades last year.
 
But now food inflation is spilling over into the general economy as activity accelerates, which has put pressure on the RBI to act.
 
The bank is set to raise the repo, the rate at which it lends to commercial banks, and the reverse repo, the rate the RBI pays to banks for deposits, by 25 basis points each.
 
"Given the growth and inflation outlook, the risk to rates is on the upside," said Rohini Malkani, chief economist (South Asia) for Citigroup, in a latest report.
 
Inflation is expected to remain problematic for the next few months but should moderate by the end of 2010 as the base effect turns favourable, analysts say.
 
"To contain inflation persistence and anchoring inflation expectations, anti-inflationary monetary policy actions become a necessity," the RBI said in its first-quarter 2010-11 report on macroeconomic and monetary developments, released Monday.
 
The Congress-led government has been under constant attack from opposition parties for its inability to protect the poorest from surging food prices.
 
The economy is forecast to expand by 8.5 percent in the fiscal year ending in March 2011, up from 7.4 percent last year.
 
Even India's giant entertainment industry Bollywood has got something to say about how soaring prices are hitting the poor.
 
A song titled "Mehangayi Daayan" ("The Inflation Witch") in a film produced by socially conscious acting star Aamir Khan goes, "my husband's earnings are good but his second wife - inflation - is eating them up."