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20 July 2024

India says inflation fight priority as rate hike looms


India's central bank said on Monday "containing inflation" was its top priority, a day ahead of a monetary policy meeting expected to hike interest rates for a seventh time in less than 12 months.

The Reserve Bank of India warned that lower inflation was key to maintaining high economic growth, making inflation "the dominant policy objective in the current environment."

The bank said "upside risks to inflation have increased" as a result of strong economic growth in Asia's third-largest economy.

Analysts expect bank policymakers to raise rates by at least 25 basis points at their quarterly meeting in Mumbai on Tuesday.

The bank said strong growth has put India's economy back on its earlier high growth trajectory of around nine percent annual expansion. But it added uncertainty about the durability of recovery in developed economies persists.

Annual inflation surged in December to 8.43 percent, up by nearly a percentage point from the previous month, stoked mainly by increases in the  cost of food but also in the prices of petrol and commodities.

Food inflation is running at 15.5 percent.

Rising prices have emerged as a major political and economic challenge in emerging markets across Asia, with China also expected to raise interest rates early next month to combat 5 percent inflation and a property bubble.

In India, pressure has been steadily growing on the central bank and government to act to curb inflation as Prime Minister Manmohan Singh and his Congress party gear up for nine state elections over the next year-and-a-half.

The bank has raised rates six times since last March, pushing the repo -- the rate on loans it makes to commercial banks -- to 6.25 percent and the reverse repo -- the rate it pays to banks for deposits -- to 5.25 percent.

"We expect the Reserve Bank will raise rates by 25 basis points but the possibility of 50 basis points also has to be entertained," said HSBC chief economist Lief Lybecker Eskesen said in a recent report.