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Interest rates: IIP, inflation hold key

Two sets of data this week — industrial output growth for May and consolidated monthly inflation for June — would largely determine the Reserve Bank of India’s (RBI) next move on interest rates, as policy makers look to contain prices amid rising demand in a high growth economy, reports HT Correspondent.

business Updated: Jul 11, 2010 21:58 IST

Two sets of data this week — industrial output growth for May and consolidated monthly inflation for June — would largely determine the Reserve Bank of India’s (RBI) next move on interest rates, as policy makers look to contain prices amid rising demand in a high growth economy.

The government will announce factory output growth figures for May on Monday and wholesale prices-based inflation data for June two days later.

As the inflation rate galloped into double digits — 10.16 per cent — in May, the RBI had announced a 0.25 percentage point hike in repo and reverse repo rates to tame prices.

Economists expect inflation to breach the 11 per cent mark in June, mirroring the rise in fuel price hike announced in the last week of the month.

RBI said the increase in fuel prices will have an immediate impact of around one percentage point on wholesale price index-based inflation, with second-round effects being felt in the months ahead.

Economists warned that rising demand could further fan prices of products and many expect the central bank to announce another 0.25 percentage point hike in repo and reverse repo rates that now stand at 5.5 per cent and 4 per cent respectively.

The RBI will meet on July 27 for its quarterly monetary policy review.

A higher repo rate—the rate at which banks borrow from RBI—would make it costlier for banks to borrow, prompting them to charge more from final home, consumer and corporate loan borrowers.

“Manufacturing inflation is inching upward and this is worrisome, reflecting a demand pressure,” said DK Joshi, chief economist of Crisil.

Rajiv Kumar, director and chief executive, Indian Council of Research in International Economic Relations, said growth in manufacturing would push demand, bolstering the possibility of a rate hike.

“We now expect a 0.25 percentage point hike in repo and reverse repo rates,” said Sonal Varma, Vice President, India Economist Nomura Financial Advisory and Securities (India) Pvt. Ltd.