Indian central bank tests options to cool inflation

New Delhi: India's central bank will take steps to contain consumer demand and tame inflation, Governor Yaga Venugopal Reddy said on Monday, raising expectations of an interest- rate increase.

"The Reserve Bank of India [RBI]will play its part in moderating and managing aggregate demand so that pressures on prices are not intensified," Reddy told reporters in the city of Pune. "We are in the midst of intensive examination of options."

Inflation in Asia's third-biggest economy has raced to 11.05 per cent, the fastest since May 1995, even as the central bank raised interest rates to a six-year high.

Policy action

Reddy said yesterday more monetary policy action will be required to prevent inflation, being stoked mainly by higher fuel prices, from accelerating further.

"We expect the central bank to go ahead with aggressive rate hikes," said Shuchita Mehta, senior economist at Standard Chartered Bank in Mumbai. "Inflation expectations need to be anchored swiftly."

Mehta expects the central bank to increase its key repurchase rate by 100 basis points to nine per cent in the year to March 31 and raise the cash reserve ratio, or the proportion of money that lenders must set aside as reserves, by 75 basis points to nine per cent.

"The RBI will continue to take determined and calibrated measures as and when warranted, with a focus on managing expectations and on enabling adjustments in the economy in response to the oil shock," Reddy said.

Reddy has raised the repurchase rate eight times in the past two-and-a-half years and increased the cash reserve ratio seven times since December 2006 to slow money supply and cool inflation. He last raised the repurchase rate on June 11 and the cash reserve ratio on April 29.