The Reserve Bank of India, in its macroeconomic report a day ahead of its monetary policy review meeting on Tuesday, said that inflation outlook was above its comfort level, setting the ground for another hike in signal rates.
"Persistence of inflation warrants continuation of anti-inflationary monetary policy stance for sustaining growth," said the RBI's document on "Macroeconomic and Monetary Policy Developments 2010-11" that serves as a precursor to the monetary policy statement."Headline inflation could remain elevated in the first half of 2011-12 before declining gradually in the second half, but could remain above the Reserve Bank's comfort level."
The general expectation is that the Reserve Bank of India will raise its repo and reverse repo rates - at which it lends to and takes cash from commercial banks - by 0.25 percentage point each, though some expect a harsher stance with double the dosage.
Higher rates squeeze cash out of the system, stymie demand and control inflation. Reserve Bank of India has already increased repo rate by 350 basis points (3.5 percentage points) since March 2010.
While Reserve Bank faces a challenge to maintain a balance between growth and inflation, Subir Gokarn, deputy governor of the Reserve Bank had earlier said, "The trade-off is more between inflation now and growth in the future."
The central bank has said growth will remain close to the trend but high oil prices pose threat.
"Growth in 2011-12 is expected to stay close to the trend. Growth risks emanate from high oil prices and some moderation in investment," said the document.