The Reserve Bank of India is widely expected to increase short-term interest rates at its policy review in April and a slight majority of analysts surveyed also see it further increasing banks’ reserve requirements.

Wholesale price index inflation, which reached 8.56 percent in January, was forecast to rise to 9.9 percent at the end of this quarter before easing to 9 percent at the end of June, 7.5 percent at the end of September and 6 percent at the end of the year, according to median forecasts.

An increase in interest rates by the Reserve Bank would be the first since it began slashing rates in late 2008 to help insulate the country from the global downturn, although it has taken other steps to tighten monetary policy in recent months.

Rising inflation and a rebounding economy, however, will likely compel the Reserve Bank of India (RBI) to tighten policy rates, the poll showed.

“We expect inflation to peak in coming months, as the statistical base effect will become more favourable. However, the risk is on the upside, since sequential inflation itself has been fairly elevated in recent months,” said Sebastien Barbe, head of emerging market research and strategy for Credit Agricole CIB.

“In addition, global food prices and local weather conditions also fuel a risk that inflation may be stronger than expected in H2. This may incite the RBI to be vigilant and tighten significantly in coming quarters,” he added.

The Reuters poll showed that 21 out of 23 economists see the RBI raising its benchmark reverse repo rate, at which it absorbs excess cash from the banking system. Of the 21 expecting an increase, 10 expect a 25 basis point rise in April and 11 see a 50 basis point rise.

Twenty one out of 24 economists polled expect the RBI to raise the repo rate, at which it lends funds to banks. Of those expecting an April increase, 12 expected a 25 basis point rise and nine expect a 50 basis point increase.

Thirteen out of 22 economists polled expected the RBI to raise the cash reserve ratio (CRR), the percentage of deposits banks must keep with the central bank, by up to 50 basis points in April. The RBI raised the CRR by a sharper-than-expected 75 basis points at its last review in late January.

The outlook for the RBI policy tightening is little changed from a Reuters survey conducted shortly after the RBI’s January policy review.

The survey showed the economy is forecast to grow 7.2 percent in the fiscal year that ends on March 31, in line with government estimates, and 8.0 percent in 2010/11.

None of the analysts surveyed expect any changes to the statutory liquidity ratio, the percentage of deposits banks must invest in government bonds, during 2010.

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Tags: Indian interest rates, RBI, Reserve Bank of India

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