India may increase interest rate again as inflation soars

Mumbai: India's central bank may raise interest rates for the second time in a month to tame the fastest inflation among Group of 20 nations.

The Reserve Bank of India will probably increase the reverse repurchase rate to 3.75 per cent from 3.5 per cent and the repurchase rate to 5.25 per cent from 5 per cent, according to the median forecast of 25 economists. The announcement is due at 11.15am in Mumbai today.

Governor Duvvuri Subbarao's struggle against inflation exposes the roadblocks in the Indian economy inadequate capacity in power, roads and ports that drive up prices. In China, where infrastructure spending is double that of India, the fastest growth in almost three years in the first quarter came with a slow down in inflation, complicating the decision in the country on when to raise interest rates.

"Domestic demand pressures are building in the Indian economy without a commensurate increase in capacity creation," said Chetan Ahya, a regional economist at Morgan Stanley in Singapore. "That coupled with a rise in global commodity prices is resulting in a spike in non-food inflation."

Consumer prices paid by industrial workers in India rose 14.9 per cent in February from a year earlier. The nation's wholesale-price inflation rate held at a 17-month high of 9.9 per cent in March.

India's $1.2 trillion (Dh4.40 trillion) economy may grow 7.5 per cent in 2010, the fastest pace after China among the major economies, according to the World Bank. Subbarao on March 19 raised interest rates by a quarter-point for the first time in almost two years.

The Reserve Bank may also increase the cash reserve ratio, or the proportion of deposits that lenders need to set aside as reserves, to 6 per cent from 5.75 per cent, according to the survey. Nine of 25 economists surveyed forecast a half-point increase in the reverse repurchase rate.

India produces about 10 percent less electricity than it needs, while roads, which account for 65 per cent of the nation's cargo, are plagued by single lanes and irregular surfaces, boosting companies' costs, according to government estimates.

Infrastructure spending accounts for just 4 per cent of India's gross domestic product compared with 9 percent of GDP in China, according to CLSA Asia-Pacific Markets. The Planning Commission of India estimated last month the country needs to more than double spending on infrastructure to $1 trillion in the five years to March 2017.