RBI may hike rate as India's inflation nears 10%

India's headline inflation topped expectations and came within touching distance of double digits in February, making a rate increase by the central bank all but inevitable at its scheduled April policy review.

Annual wholesale price inflation accelerated to 9.89 per cent in February, the highest since October 2008 and well above the Reserve Bank of India's (RBI) end-March projection of 8.5 per cent and the 8.56 per cent January reading.

The inflation data comes on the heels of a 16.7 per cent annual jump in industrial output in January, with the unexpectedly strong economic pickup also backing the case for the central bank to raise policy rates by at least 25 basis points.

"This seals the case for rate hike so we expect both reserve ratio and interest rate hike on or before April policy meeting," said Ramya Suryanarayanan, an economist with DBS in Singapore.

A Reuters poll had estimated headline inflation in February to be 9.62 per cent, and markets were little moved.

While government officials spoke out against raising rates ahead of the past two quarterly RBI meetings for fear of choking off recovery, they have less case for making a similar argument next month as inflation surges and growth broadens.

"It is worrying that inflation always turns out higher than expected, and the fact that there is a huge backward revision is also not good," Suryanarayanan said.

The December figure was revised to 8.1 per cent from 7.3 per cent.

The partially convertible rupee was little changed at 45.56/57, while the 30-share BSE index was flat.

The 10-year bond yield edged up one basis point to 8.02 per cent, matching a 17-month high touched last week. It had closed at 8.01 per cent in the previous session. Rising inflation and the government's plan to borrow a record $100 billion (Dh367bn) in the fiscal year that starts April 1, most of which is expected in the first half, have weighed on bond prices.

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