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UPDATE 3-Indian inflation jumps again, tighter policy seen

Fri Jul 4, 2008 4:50pm IST
 
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By Rajkumar Ray

NEW DELHI, July 4 (Reuters) - Indian inflation accelerated to 11.63 percent in late June, above forecasts and its highest since the series began in 1995, raising the likelihood of an interest rate increase this month to follow two in June.

The data was leaked early to newspapers, sending the benchmark 10-year bond yield to a seven-year high of 8.99 percent in morning trade as inflation topped a consensus forecast of 11.44 percent and is now expected to exceed 12 percent soon.

The Reserve Bank of India (RBI) raised its key repo rate twice in June to a six-year high of 8.5 percent to deter second-round price rises following increases in the cost of fuel, raw materials and food on world markets.

Economists polled by Reuters last week expected the central bank to raise the rate another 25-50 basis points in the fiscal year to March.

"The momentum in inflation continues to accelerate and that is a worrying sign. With rising input costs, there is a lot of pressure on producers to increase output prices," said Sonal Varma, an economist at Lehman Brothers in Mumbai.

"Given this risk of second-round effects, we expect the RBI to hike the repo rate by 25 basis points at the July policy review, and the cash reserve ratio by 50 basis points in Q3 2008."

The cash reserve ratio is the proportion of funds banks have to keep on deposit with the central bank. It is due to rise to 8.75 percent in two 25-basis-point stages on July 5 and July 19.  Continued...

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