India's central bank is set to hike interest rates this week for a second time in just under a month in an attempt to check near double-digit inflation, analysts say.
Annual wholesale price inflation, the main cost-of-living measure, is riding at a 17-month high of 9.90 per cent, exceeding the Reserve Bank of India's forecast of 8.5 per cent, well above its preferred 5.5 per cent pace of increase.
India's central bank "is virtually certain to tighten again" at its policy meeting next Tuesday, said Kevin Grice, economist at Capital Economics.
Economists fear inflation in Asia's third-largest economy could accelerate as demand for cars, appliances and manufactured goods rebounds with economic growth gaining pace, shaking off the effects of the global slump.
Indian inflation has been rising in past months due to spiralling food costs after farm output was hit by the country's worst monsoon in nearly four decades last year.
But now food inflation is spilling over into the general economy as activity accelerates, pushing the central bank to act, anlaysts says.
Economsts expect the Reserve Bank to raise two key short-term interest rates by 25 basis points at its policy meeting on Tuesday.
The interest rate cycle is turning in Asia as the region's economies recover from the deep global recession.
A tightening of liquidity through raising cash reserves which commercial banks must set aside is also not ruled out, but this may not happen immediately, analysts say.
"The bank needs to stabilise market expectations," said Dipankar Mitra, economist at London-based investment bank Execution Noble.
"The direction is for rates to go up further," Mitra said.
On March 19, India's central bank, which has joined its peers in such countries as Australia and Malaysia in starting to unwind stimulus aimed at shielding the economy from the downturn, hiked interest rates from record lows.
It raised the repo, the rate at which it lends to commercial banks, by 25 basis points to five per cent and also hiked the reverse repo, the rate it pays to banks for deposits, by 25 basis points to 3.5 per cent.
It was the first rise in benchmark rates since 2008.
The Asian Development Bank (ADB) said India's economic rebound from the global financial crisis will gain pace in 2010, but inflationary pressures will require special attention, a report released last week said.
Inflation is a politically sensitive issue in India and the left-leaning Congress-led government has been under attack from opposition parties for its inability to control food prices.
"Some amount of tightening is required," government financial services secretary R. Gopalan told reporters last week.
Analysts say inflation could peak at near 11 percent by June, after which the rate could slacken but still be at "uncomfortable levels."
Goldman Sachs has raised its forecast for inflation for the fiscal year to March 2011 to 7.5 per cent from 6.0 per cent earlier, stoked by rising consumer and commodity prices.
"Inflation will be high and sticky in 2011," said Goldman Sach economist Tushar Poddar, forecasting the central bank could hike rates by 150 basis points in 2010.
Growth has been robust in India after last year's slowdown with industrial output expanding for a sixth straight month.
Output by factories, mines and utilities grew 15.1 per cent year-on-year in February, latest data showed, lifted by fiscal stimulus, cheap borrowing costs, resurgent consumer consumption and growing export demand.
India's economy may expand by as much as 8.75 per cent in the financial year that began April 1, from an estimated 7.2 per cent in the last 12 months and be back at pre-financial crisis levels of nine per cent next year, the government says.